Reg. ICA No. 811-8360
File No. 33-75340
As filed via EDGAR with the Securities and Exchange Commission on April 2, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 20 |X|
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 20
GUINNESS FLIGHT INVESTMENT FUNDS
(Exact Name of Registrant as Specified in Charter)
225 South Lake Avenue, Suite 777
Pasadena, California 91101
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (818) 795-0039
Susan Penry-Williams, Esq.
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
(Name and Address of Agent for Service)
Copy to:
Mr. James Atkinson
Guinness Flight Investment Funds
225 South Lake Avenue, Suite 777
Pasadena, California 91101
It is proposed that this filing will become effective:
|_| Immediately upon filing pursuant to |_| on (date) pursuant
paragraph (b) to paragraph (b)
|_| 60 days after filing pursuant to |_| on (date) pursuant to
paragraph (a)(1) paragraph (a)(1)
|X| 75 days after filing pursuant to |_| on (date) pursuant to
paragraph (a)(2) paragraph (a)(2), of rule 485(b).
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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CROSS-REFERENCE SHEET
(Pursuant to Rule 404 showing location in each form of Prospectus of
the responses to the Items in Part A and location in each form of Prospectus and
the Statement of Additional Information of the responses to the Items in Part B
of Form N-1A).
GUINNESS FLIGHT [ ] INDEX FUND
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
------------ ------------------ -----------------------
1(a) Front Cover Page *
(b) Back Cover Page *
2(a) Risk/Return Summary: *
Investment Objective
(b) Investment Strategies *
(c) Not Applicable *
3 Fees and Expenses *
4(a) Risk/Return Summary: *
Investment Objective
(b) Investment Strategies *
(c) Risk/Return Summary: *
Principal Risks; Risks of
Investing
5 Not Applicable *
6(a) Guinness Flight Management *
(b) Not Applicable *
7(a) Finances - Net Asset Value *
(b) Shareholder Guide: Your *
Account with Guinness Flight -
Investment Minimums, How to
Purchase, Exchange and Sell
Shares, Subsequent Investments
(c) Shareholder Guide: Your *
Account with Guinness Flight -
Investment Minimums, How to
Exchange and Redeem Shares,
Exchanges and Redemption
Issues
(d) Finances - Dividends and *
Capital Gains Distributions
(e) Finances - Tax Issues *
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(f) Not Applicable *
8(a) Not Applicable *
(b) Finances - Distribution Plan *
(c) Not Applicable *
9 Not Applicable *
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GUINNESS FLIGHT [ ] INDEX FUND
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Item Number
Form N-1A, Statement of Additional
Part B Prospectus Caption Information Caption
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10 * Front Cover Page
11 * General Information and
History
12(a) * General Information and
History
12(b) Investment Strategies; Principal Investment Strategies and
Risks; Risks of Investing Risks
12(c) * Investment Restrictions and
Policies
12(d) * Investment Objective and
Policies
12(e) * Not Applicable
13(a) * Management of the Funds
13(b) * Management of the Funds
13(c) * Management of the Funds
13(d) * Management of the Funds
13(e) * Not Applicable
14(a) * Not Applicable
14(b) * Shareholder Reports -
Principal Holders
14(c) * Management of the Funds
15(a) Guinness Flight Management The Investment Adviser and
Advisory Agreements
(b) * Not Applicable
(c) Guinness Flight Management The Investment Adviser and
Advisory Agreements
(d) * The Administrator;
Administration Agreement,
Distribution Agreement and
Distribution Plan
(e) * Not Applicable
(f) * Not Applicable
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(g) * Administration Agreement,
Distribution Agreement and
Distribution Plan
(h) * Not Applicable
16(a) * Portfolio Transactions
(b) * Portfolio Transactions
(c) * Portfolio Transactions
(d) * Not Applicable
(e) * Not Applicable
17(a) * Description of the Funds
(b) * Not Applicable
18(a) How to Purchase, Exchange Additional Purchase and
and Sell Shares Redemption Information
(b) * Not Applicable
(c) Finances - Net Asset Value Computation of Net Asset
Value
(d) * Additional Purchase and
Redemption Information
19(a) * Tax Matters
(b) * Tax Matters
20(a) * Not Applicable
(b) * Not Applicable
(c) * Not Applicable
21(a) * Not Applicable
(b) * Performance Information
22(a) * Financial Statements
(b) * Financial Statements
</TABLE>
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(c) * Financial Statements
</TABLE>
Part C
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Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
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[GRAPHIC]
PROSPECTUS _____________, 1999
GUINNESS FLIGHT [ ] INDEX FUND
This Prospectus covers the Guinness Flight [ ] Index Fund (the "[ ] Index Fund"
or "Fund"). You will find specific information in this Prospectus about this
Fund plus general information about investing with Guinness Flight Investment
Funds (the "Guinness Flight Funds"). You may find additional information in the
Statement of Additional Information for Guinness Flight Funds, which is
incorporated by reference into this Prospectus. If you would like the combined
prospectus that covers the other Guinness Flight Funds, please contact us.
The Securities and Exchange Commission has not approved or disapproved the above
listed Fund. The Securities and Exchange Commission also has not determined
whether this Prospectus is accurate or complete. Any person who tells you that
the Securities and Exchange Commission has made such approval or determination
is committing a crime.
Risk/Return Summary
Investment Objective
The [ ] Index Fund's investment objective is long-term capital appreciation
primarily through investments in equity securities of companies that comprise
the [ ] Index.(1)
Investment Strategies
The [ ] Index Fund will invest at least 85% of its total assets in the
securities that comprise the [ ] Index. As an index fund, the [ ] Index Fund
will attempt to replicate the performance of the [ ] Index. In managing the
Fund, we will generally follow a policy of "full replication," meaning that the
Fund will generally invest in all 50 component issues that comprise the [ ]
Index in the proportion they are represented within the Index. From time to
time, we may also use a method known as "index sampling," an investment
technique that seeks to replicate the performance of the Index by investing in a
subset of the 50 component stocks.
For the purposes of the Index, an Internet stock is defined as a company that
derives a majority of its revenue from the Internet.
The [ ] Index consists of companies that represent the following sectors within
the Internet industry:
o e-commerce - buying and selling of goods and services using the Internet
o software - software tools that enable companies and individuals to connect,
create and control their access to and appearance on the Internet
o hardware - servers, routers, and network infrastructure devices for
managing Internet presence
o security - software and services that protect web sites and users from
fraud, theft and unauthorized access
o content - information, data and editorial product for the web
o high-speed services - cable Internet, DSL and other next-generation
Internet infrastructure
o access - Internet service providers and firms providing access to and from
the Internet
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(1) "[ ]" is a service mark, and "[ ]," a registered trademark of [ ],
which provides [ ] and other print publications. MORE COPYRIGHT DISCLOSURE
FROM TRADEMARK OWNER.
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The [ ] Index is generally reviewed quarterly, primarily by a Senior Investment
Analyst of [ ], to ensure that it includes the most representative Internet
stocks. "Most representative" means that if a new type of service or company
goes public, or if a company changes direction into a new market segment (of the
7 segments mentioned), that these companies are included in the [ ] to give it
the breadth and the depth an index of this nature provides. However, if a new
category debuts intra-quarterly that stock may be added to the [ ] immediately
upon the initial public offering or soon thereafter. In that way, the [ ] will
continue to be the most up-to-date and dynamic Internet stock Index.
The goal is for the Index to contain at least the top 3 or 4 companies in each
of the 7 Internet sectors that are recognized within the [ ] Index. Leading
firms are measured by one or all of the following key metrics:
o Overall market share,
o Total revenue and/or earnings (loss) vs. peers,
o Monthly unique users,
o Monthly page views,
o Total number of buying customers (for e-commerce firms), and
o Market capitalization vs. peers.
[Sidebars:]
[ ] was created in April, 1996 by [ ], to track the group performance of a
representative cross section of Internet stocks. The goal is for the Index to
contain at least the top 3 or 4 companies in each of the 7 Internet sectors that
are recognized within the [ ] Index.
As an Internet index, [ ] is attempting to capture the growth of the Internet,
which is a global collection of connected computers that allows commercial and
professional organizations, educational institutions, government agencies, and
consumers to communicate electronically, access and share information, and
conduct business.
The [ ] Index is adjusted for stock splits, mergers, acquisitions or delistings
similar to how the Dow Jones Industrial Average is adjusted.
Principal Risks
The [ ] Index Fund is subject to the risks common to all mutual funds that
invest in equity securities and the securities that make up the [ ] Index. You
may lose money if any of the following occur:
o the [ ] Index goes down;
o Internet stocks fall out of favor with investors;
o the [ ] Index is more adversely affected by a market downturn than a
larger, more broad-based index due to its concentration and focus on
Internet stocks or a specific sector within the Internet industry; or
o Internet companies in the [ ] Index lose money due to intense pricing
pressure or high capital investment costs.
See "Risks of Investing" on page 3 for a more detailed discussion of the risks
associated with investing in this Fund.
2
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Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the [ ] Index Fund:
Shareholder Fees (Fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases (as % of offering price) 0%
Maximum Deferred Sales Charge (Load) 0%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends/Distributions 0%
Redemption Fee (as % of amount redeemed, if applicable) 0%*
Exchange Fee 0%*
30-Day Redemption/Exchange Fee 2%*
Maximum Account Fee 0%
*You will be charged a 2% fee if you redeem or exchange shares of this Fund
within 30 days of purchase.
Annual Fund Operating Expenses (Expenses that are deducted from Fund assets)
Advisory Fee: xxx
Rule 12b-1 Fee: 0%
Estimated Other Expenses: 0.45%
Estimated Total Annual Fund Operating Expenses*: xx.xx%
*Guinness Flight Investment Management Limited is contractually obligated to cap
the Fund's Total Annual Fund Operating Expenses at x.xx% through month, 31, yr.
Example
This example is to help you compare the cost of investing in the [ ] Index Fund
with the cost of investing in other mutual funds.
The Example assumes that:
o you invest $10,000 in the Fund for the time periods indicated;
o your investment has a 5% return each year; and
o the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, under these assumptions, your
costs would be:
1 Year 3 Years 5 Years 10 Years
$ $ $ $
Risks of Investing
As with all mutual funds, investing in this Fund involves certain risks. We
cannot guarantee that this Fund will meet its investment objective or that this
Fund will perform as it has in the past. You may lose money if you invest in
this Fund.
The Fund may use various investment techniques, some of which involve greater
amounts of risk. We discuss these investment techniques in detail in the
Statement of Additional Information. To reduce risk, the Fund is subject to
certain limitations and restrictions, which we also describe in the Statement of
Additional Information. You should consider the risks described below before you
decide to invest in our Fund.
3
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Risks of Investing in Mutual Funds
The following risks are common to all mutual funds and therefore apply to the
[ ] Index Fund:
o Market Risk. The market value of a security may go up or down, sometimes
rapidly and unpredictably. These fluctuations may cause a security to be
worth less than it was at the time of purchase. Market risk applies to
individual securities, a particular sector or the entire economy.
o Manager Risk. Fund management affects Fund performance. The Fund may lose
money if the Fund manager's investment strategy does not achieve the Fund's
objective or the manager does not implement the strategy properly.
o Year 2000 Risk. The Fund or its service providers could be disrupted by
problems in its computer systems related to the Year 2000.
Risks of Investing in Small Cap Companies
The following risks are common to all mutual funds that invest in small
capitalization companies (those with a market value of less than U.S. $1
billion), and therefore apply to the [ ] Index Fund which includes small cap
stocks. As a general rule, investments in stock of small cap companies (those
with a market value of less than U.S. $1 billion) are more risky than
investments in the stock of larger companies (those with a market value of more
that U.S. $1 billion) for the following reasons, among others:
o small cap companies tend to rely on more limited product lines and business
activities, which makes them more susceptible to setbacks or downs turns;
o the stock of small cap companies may be traded less frequently than that
of larger companies; and
o small cap companies have more limited financial resources.
Risks of Investing in the [ ] Index
The following risks apply to the [ ] Index Fund:
o Index Concentration. The [ ] Index Fund is comprised of 50 companies.
Because of this concentration and focus on Internet stocks, the [ ] Index
Fund may exhibit more volatility and fluctuation on a day-to-day basis than
a larger, broad-based index.
o Industry Concentration. The [ ] Index Fund is solely invested in Internet
companies or Internet-related companies. Because of this concentration and
focus, the Fund may exhibit a greater degree of volatility and fluctuation
on a day-to-day basis than a larger, broader-based index.
o Internet Company Risk. Internet companies, which are the primary components
of the [ ] Index, are subject to special risks. Internet stocks are subject
to a more rapid rate of change in technology and products than other
stocks. As a result, the share prices of Internet companies will fluctuate
to a greater degree than other stocks. Changes in telephone and cable
regulations, anti-trust regulations and freedom of speech laws may have a
material effect on the demand for Internet services. Many of the products
and services of Internet companies are subject to high risks of
obsolescence caused by advances in science and technology.
4
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Guinness Flight Management
Investment Advisor
Guinness Flight Investment Management Limited is the investment advisor for the
Guinness Flight Funds. Guinness Flight supervises all aspects of the Fund's
operations and advises the Fund, subject to oversight by the Fund's Board of
Trustees. For providing these services, the Fund pays Guinness Flight an
annualized xx% advisory fee.
Guinness Flight Investment Management Limited is a subsidiary of Investec
Guinness Flight, which is a subsidiary of Investec Group Limited. Investec
Guinness Flight was created in November 1998 through the merger of Guinness
Flight Hambro Asset Management Limited and Investec Asset Management.
Investec Guinness Flight manages 91 investment funds domiciled in the United
Kingdom, South Africa, Guernsey, Dublin and the United States. Investec Group,
established in 1974, is an independent, international investment and private
banking group. It was listed on the Johannesburg Stock Exchange in 1986 and is
the largest independent investment banking group in South Africa.
The primary offices of Investec Guinness Flight are located in the U.K., South
Africa, Hong Kong and the United States. The U.S. office of Guinness Flight is
located at 225 S. Lake Ave., Ste. 777, Pasadena, CA 91101. Investec Guinness
Flight's main office is located in London, England at Lighterman's Court, 5
Gainsford Street, Tower Bridge SE1 2NE. The Hong Kong office is located at 2108
Jardine House, One Connaught Place, Central, Hong Kong. Investec Group's main
office is located at 100 Grayston Drive, Sandown, Sandton, Johannesburg, SA
2196, South Africa.
Portfolio Management
Doug Blatch.
Mr. Blatch joined Investec Asset Managment in April 1996 and is the portfolio
manager responsible for all domestic and international index funds and
derivatives trading. He currently manages four index funds available to offshore
investors as well as the Wired Index Fund and [ ] Index Fund.
Shareholder Guide: Your Account with Guinness Flight
Investment Minimums. The minimum initial investments are:
Type of Account Minimum
Regular (new investor) $2,500
Regular (Guinness Flight Shareholders) $1,000
Retirement $1,000
Gift $250
Pre-authorized investment plan (Initial and installment payments) $100
Additional investments $250
We may reduce or waive the minimum investment requirements in some cases.
5
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Types of Accounts We Offer.
Regular-These accounts are taxable Retirement-These accounts are generally
nontaxable
o Individual o Roth IRA
o Joint Tenant o Regular IRA
o UGMA/UTMA o Rollover IRA
o Trust o Roth Conversion
o Corporate o SEP IRA
o 401 (k)
o 403 (b)
How to Purchase, Exchange, and Sell Shares.
The Transfer Agent is open from 8am to 6pm Eastern Time for purchase, redemption
and exchange orders. Shares will be purchased, exchanged and redeemed at NAV per
share. A Fund's NAV per share is calculated by subtracting the Fund's
liabilities from its assets and dividing by the total number of Fund shares
outstanding. The transfer agent must receive your request by the close of the
New York Stock Exchange to receive the NAV of that day. If your request is
received after 4pm Eastern time, it will be processed the next business day.
With respect to the Asia Funds, this cut-off time is 9:30 am Eastern time,
meaning that purchase, exchange and redemption orders must be received by that
time to be processed that day. The phone number you should call for account
transaction requests is (800) 915-6566.
SSgA Money Market Fund
Guinness Flight does not operate a money market fund; however you may purchase
or exchange shares of the SSgA Money Market Fund through Guinness Flight. State
Street Bank & Trust Co. advises the SSgA Money Market Fund. Their address is 225
Franklin Street, Boston MA 02110. You may only purchase shares of the SSgA Money
Market Fund if it is available to residents of the state in which you reside.
Please read the prospectus of the SSgA Money Market before you decide to invest.
You may request a SSgA Money Market prospectus by calling (800) 915-6566.
How to Purchase Shares. You may purchase shares of any Guinness Flight Fund or
the SSgA Money Market Fund by mail, wire or auto-buy. You may exchange shares of
any Guinness Flight Fund for shares of another Guinness Flight Fund or the SSgA
Money Market Fund by mail or wire. A broker may charge you a transaction fee for
making a purchase for you.
Mail (graphic): To purchase by mail, you should:
o Complete and sign the account application
o To open a regular account, write a check payable to "Guinness Flight
Investment Funds"
o To open a retirement account, write a check payable to the custodian or
trustee
o Send your account application and check or exchange request to one of the
following addresses:
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For a Business reply envelope: For a stamped envelope:
Guinness Flight Investment Funds Guinness Flight Investment Funds
P.O. Box 9288 P.O. Box 8500
Boston, MA 02205-8559 Boston, MA 02266-8500
For an overnight package:
Boston Financial Data Services
ATTN: Guinness Flight Investment Funds
Two Heritage Drive, 3rd Floor
North Quincy, MA 02171
Wire (graphic): To purchase by wire, call the Transfer Agent at (800) 915-6566
between 8am and 6pm Eastern Time on a business day to get an account number and
detailed instructions. You must then provide the Transfer Agent with a signed
application within 10 business days of the initial purchase. Instruct your bank
to send the wire to:
State Street Bank and Trust Company
ABA #0110 00028
Shareholder and Custody Services
DDA # 99050171
ATTN: [Your Name]
(Fund Account Number)
Pre-Authorized Investment Plan. With a pre-authorized investment plan, your
personal bank account is automatically debited on a monthly or quarterly basis
to purchase shares of a Fund. You will receive the Net Asset Value (NAV) per
share as of the date the debit is made.
Auto-Buy: You may purchase additional shares of a Fund you own by ACH (automated
clearing house) after you elect the Auto-Buy option on your account. To elect
the Auto-Buy option, select it on your account application or call the Transfer
Agent and request an optional shareholder services form. ACH is similar to the
pre-authorized investment plan, except that you may choose the date on which you
want to make the purchase. We will need a voided check or deposit slip before
you may purchase by ACH.
Subsequent Investments: If you are making an additional investment in a Fund,
you should include either the stub from a previous confirmation statement or a
letter providing your name and account number to ensure that the money is
invested in your existing Guinness Flight account.
Purchase Order Cut-Off. We may cease taking purchase orders for the Funds at any
time when we believe that it is in the best interest of our current
shareholders. The purpose of such action is to limit increased Fund expenses
incurred when certain investors buy and sell shares of the Funds for the
short-term when the markets are highly volatile.
How to Exchange and Redeem Shares. You may exchange or redeem shares by mail or
telephone. When you exchange shares, you sell shares of one Guinness Flight Fund
and buy shares of another Fund. You may realize either a gain or loss on those
shares and will be responsible for paying the appropriate taxes. If you exchange
or redeem through a broker, the broker may charge you a transaction fee. If you
purchased your shares by check, you may not redeem the account until the check
has cleared, which may take up to 15 calendar days. You may receive the proceeds
of redemption by wire or through a systematic withdrawal plan as described
below.
Mail: To exchange or redeem by mail, please:
o Provide your name and account number;
o Specify the number of shares or dollar amount and the Fund name or number;
o To exchange shares, specify the name of the Fund (either another Guinness
Flight Fund or the SSgA Money Market) you want to purchase;
o Sign the redemption or exchange request (the signature must be the same as
the one on your account application). Make sure all parties that are
required by the account registration sign the request; and
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o Send your request to the appropriate address above under purchasing by
mail.
Telephone: You may redeem or exchange your shares of a Guinness Flight Fund
either in writing or by telephone if you authorized telephone redemption on your
account application. To exchange or redeem by telephone, call the Transfer Agent
at (800) 915-6566 between the hours of 8am and 6pm on a day the New York Stock
Exchange is open for business. For your protection against fraudulent telephone
transactions, we will use reasonable procedures to verify your identity. As long
as we follow these procedures, we will not be liable for any loss or cost to you
if we act on instructions to redeem your account that we reasonably believe to
be authorized by you. You will be notified if we refuse telephone redemption or
exchange. Telephone exchanges or redemptions may be difficult during periods of
extreme market or economic conditions. If this is the case, please send your
exchange request my mail or overnight courier.
Wire: You may have the proceeds of the redemption request wired to your bank
account for redemptions of $500 or more. Please provide the name, location, ABA
or bank routing number of your bank and your bank account number. Payment will
be made within 3 business days after the Transfer Agent receives your written or
telephone redemption request. There is a $10 fee for redemption by wire.
Systematic Withdrawal Plan: You may establish a systematic withdrawal plan where
you have regular monthly or quarterly payments redeemed from your Guinness
Flight account and sent to either you or a third party you designate. Payments
must be at least $100 and your Guinness Flight Fund must have an account value
of at least $1,000. You will receive the NAV on the date of the scheduled
withdrawal and will redeem enough full and fractional shares at that NAV to
equal the requested withdrawal. You may realize either a capital gain or loss on
the withdrawals that must be reported for tax purposes. You may purchase
additional shares of a Fund under this plan as long as the additional purchases
are equal to at least one year's scheduled withdrawals.
Signature Guarantee. The redemption requests listed below require a signature
guarantee. You can get a signature guarantee from certain banks, brokers,
dealers, credit unions, securities exchanges, clearing agencies and savings
associations. A notarization and acknowledgment by a notary public is not a
signature guarantee.
o Redemptions by corporations, partnerships, trusts or other fiduciary
accounts;
o Redemption of an account with a value of at least $50,000 if you are making
the request in writing (if you have authorized telephone redemption on your
account, you may redeem by telephone without a signature guarantee);
o Redemption of an account where proceeds are to be paid to someone other
than the record owner; or
o Redemption of an account where the proceeds are to be sent to an address
other than the record address.
Additional Exchange and Redemption Information
o Redemption Fee. You will be charged a redemption fee of 1% of the value of
the shares being redeemed if you redeem your shares of the Asia Blue Chip
Fund, Asia Small Cap Fund or Wired Index Fund within 30 days of purchase.
You will be charged a redemption fee of 2% of the value of the shares being
redeemed if you redeem your shares of the China & Hong Kong Fund or [ ]
Index Fund within 30 days of purchase. You will be charged a redemption fee
of 2% of the value of the shares being redeemed if you redeem your shares
of the Mainland China Fund within 60 days of purchase. There will not be a
redemption fee if the shares were acquired through reinvestment of
distributions. Redemptions are on a first-in, first-out basis. The
redemption fee will be waived if the fee is equal to or less than .10% of
the total value of the redemption.
o Small Accounts. To reduce our expenses, we may redeem an account if the
total value of the account falls below $500 due to redemptions. You will be
given 30 days prior written notice of this redemption. During that period,
you may purchase additional shares to avoid the redemption.
o Check Clearance. The proceeds from a redemption request may be delayed up
to 15 calendar days from the date of the receipt of a purchase check until
the check clears. If the check does not clear, you will be responsible for
the loss. This delay can be avoided by purchasing shares by wire or
certified bank checks.
o Exchange Limit. In order to limit expenses, we reserve the right to limit
the total number of exchanges you can make in any year to four.
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o Credit Line. We may borrow cash temporarily from an established line of
credit with Deutsche Bank AG to satisfy redemption requests.
o Suspension of Redemptions. We may temporarily suspend the right of
redemption or postpone payments under certain emergency circumstances or
when the SEC orders a suspension.
Finances
Net Asset Value. The NAV per share of the Fund is determined as of 4:00 p.m.
Eastern Time on each day the New York Stock Exchange is open for business. The
NAV is calculated by 1) subtracting a Fund's liabilities from its assets and
then 2) dividing that number by the total number of outstanding shares. This
procedure is in accordance with Generally Accepted Accounting Principles.
Securities without a readily available price quotation may be priced at fair
value. Fair value is determined in good faith by or under the supervision of the
Fund's officers under methods authorized by the Board of Trustees.
Dividends and Capital Gains Distributions. The [ ] Index Fund distributes all or
most of its net investment income and net capital gains to shareholders.
Dividends and capital gains for the Fund are normally declared and paid
semi-annually, in June and December. When calculating the amount of capital gain
for the Fund, the Fund can offset any capital gain with net capital loss (which
may be carried forward from a previous year).
Your dividends and/or capital gains distributions will be automatically
reinvested on the ex- dividend date when there is a distribution, unless you
elect otherwise, so that you will be buying more of both full and fractional
shares of the Fund. You will be buying those new shares at the NAV per share on
the ex- dividend date. You may choose to have dividends and capital gains
distributions paid to you in cash. You may also choose to reinvest dividends and
capital gains distributions in shares of another Guinness Flight Fund. You may
authorize either of these options by calling the Transfer Agent at (800)
915-6566 and requesting an optional shareholder services form. You must complete
the form and return it to the Transfer Agent before the record date in order for
the change to be effective for that dividend capital gains distribution.
Buying Before a Dividend. If you purchased the Fund on or before the record
date, you will receive a dividend or capital gains distribution. The
distribution will lower the NAV per share on that date and represents, in
substance, a return of basis (your cost); however you will be subject to Federal
income taxes on this distribution.
Tax Issues. The following tax information is based on tax laws and regulations
in effect on the date of this Prospectus. These laws and regulations are subject
to change. Shareholders should consult a tax professional for the tax
consequences of investing in our Fund as well as for information on state and
local taxes which may apply. A statement that provides the Federal income tax
status of the Fund's distributions will be sent to shareholders promptly at the
end of each year.
o Distributions to Shareholders. Distributions to shareholders fall into two
tax categories. The first category is ordinary income distributions.
Ordinary income distributions are distributions of net investment income,
which includes dividends, foreign currency gains and short- term capital
gains. Long- term capital losses and foreign currency losses are used to
offset ordinary income. The second category of distribution is capital
gains distributions. Capital gains distributions are distributions of the
Fund's long- term capital gain it receives form selling stocks within its
portfolio. Short- term capital losses are used to offset long- term capital
gain. You have to pay taxes on both distributions even though you have them
automatically reinvested. On some occasions a distribution made in January
will have to be treated for tax purposes as having been distributed on
December 31 of the prior year.
o Gain or Loss on Sale of Shares of the Fund. You will recognize either a
gain or loss when you sell shares of your Fund. The gain or loss is the
difference between the proceeds of the sale (the NAV of the Fund on the
date of sale times the number of shares sold) and your adjusted basis. Any
loss realized on a taxable sale of shares within six months from the date
of their purchase will be treated as a long- term capital loss that can be
used to offset short- term capital gains on those shares. If you sell
shares of the Fund at a loss and repurchase shares of the same Fund 30 days
before or after the sale, a deduction for the loss is generally disallowed
(a wash sale).
9
<PAGE>
o Foreign Source Income and Withholding Taxes. Some of the Funds' investment
income may be subject to foreign income taxes that are withheld at the
source. If the Fund meets certain legal requirements, it may pass- through
these foreign taxes to shareholders. Shareholders may then claim a foreign
tax credit or a foreign tax deduction for their share of foreign taxes
paid.
Distribution Plan. The Fund has adopted a Distribution Plan under Rule 12b- 1 of
the Investment Company Act of 1940, as amended. Under this plan, no separate
payments are authorized by the Fund. We must use fee revenues or other resources
to pay the expenses of shareholder servicing and record keeping. We may also
make payments from these sources to third parties, including affiliates and
independent contractors, for these types of services.
[back cover page]
Statement of Additional Information. The Statement of Additional Information
provides a more complete discussion about the Fund and is incorporated by
reference into this prospectus, which means that it considered a part of this
prospectus.
Annual and Semi- Annual Reports. The annual and semi- annual reports to
shareholders contain additional information about the Fund's investments,
including a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
To Review or Obtain this Information. The Statement of Additional Information
and annual and semi- annual reports are available without charge upon your
request by calling Guinness Flight as (800) 915-6566 or by calling or writing a
broker-dealer or financial intermediary that sells our Fund. This information
may be reviewed at the Public Reference Room of the Securities and Exchange
Commission or by visiting the SEC's World Wide Website at http:// www.sec.gov.
In addition, this information may be obtained for a fee by writing or calling
the Public Reference Room of the Securities and Exchange Commission, Washington,
D.C. 20549-6009, telephone (800) SEC-0330.
Investment Company Act file no. 811-08360
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STATEMENT OF ADDITIONAL INFORMATION
GUINNESS FLIGHT INVESTMENT FUNDS
225 South Lake Avenue, Suite 777
Pasadena, California 91101
GUINNESS FLIGHT CHINA & HONG KONG FUND
GUINNESS FLIGHT ASIA BLUE CHIP FUND
GUINNESS FLIGHT ASIA SMALL CAP FUND
GUINNESS FLIGHT MAINLAND CHINA FUND
GUINNESS FLIGHT NEW EUROPE FUND
GUINNESS FLIGHT WIRED(R) INDEX FUND
GUINNESS FLIGHT [ ] INDEX FUND
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
This Statement of Additional Information (the "SAI") is not a prospectus, but
should be read in conjunction with the current prospectus dated November 23,
1998, pursuant to which the Guinness Flight China & Hong Kong Fund (the "China &
Hong Kong Fund"), Guinness Flight Asia Blue Chip Fund (the "Asia Blue Chip
Fund"), Guinness Flight Asia Small Cap Fund (the "Asia Small Cap Fund"),
Guinness Flight Mainland China Fund (the "Mainland China Fund"), Guinness Flight
New Europe Fund (the "New Europe Fund"), Guinness Flight Wired(R) Index Fund
(the "Wired Index Fund") and Guinness Flight Global Government Bond Fund (the
"Global Government Bond Fund") are offered, and in conjunction with the current
prospectus dated ______, 1999, pursuant to which Guinness Flight [ ] Index Fund
(the "[ ] Index Fund") (each fund to which this SAI relates will be referred to
as, collectively, the "Funds") is offered (each, a "Prospectus"). Please retain
this document for future reference.
For a free copy of either Prospectus, please call the Funds at 1-800-915-6565
GENERAL INFORMATION AND HISTORY............................................. 3
INVESTMENT OBJECTIVE AND POLICIES........................................... 3
INVESTMENT STRATEGIES AND RISKS............................................. 6
OTHER RISK FACTORS AND SPECIAL CONSIDERATIONS............................... 16
INVESTMENT RESTRICTIONS AND POLICIES........................................ 20
PORTFOLIO TRANSACTIONS...................................................... 21
COMPUTATION OF NET ASSET VALUE.............................................. 22
PERFORMANCE INFORMATION..................................................... 23
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................. 24
<PAGE>
TAX MATTERS................................................................. 25
MANAGEMENT OF THE FUNDS..................................................... 30
THE INVESTMENT ADVISER AND ADVISORY AGREEMENTS.............................. 32
THE ADMINISTRATOR........................................................... 34
ADMINISTRATION AGREEMENT, DISTRIBUTION AGREEMENT AND DISTRIBUTION PLAN...... 34
DESCRIPTION OF THE FUNDS.................................................... 35
SHAREHOLDER REPORTS......................................................... 35
FINANCIAL STATEMENTS........................................................ 37
GENERAL INFORMATION......................................................... 38
APPENDIX A ................................................................. 39
Dated: ___________, 1999
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GENERAL INFORMATION AND HISTORY
Guinness Flight Investment Funds ("Guinness Flight Funds") was first
organized as a Maryland Corporation on January 7, 1994 and converted to a
Delaware business trust on April 28, 1997 as an open-end, series, management
investment company. Currently, Guinness Flight Funds offers eight separate,
non-diversified, series portfolios: the China & Hong Kong Fund, the Asia Blue
Chip Fund, the Asia Small Cap Fund, the Mainland China Fund, the New Europe
Fund, the Wired(R)./1/ Index Fund, the [ ] (R)./2/ Index Fund and the Global
Government Bond Fund, each of which has unique investment objectives and
strategies.
INVESTMENT OBJECTIVE AND POLICIES
General Information about the Funds.
The China & Hong Kong Fund's investment objective is long term capital
appreciation primarily through investments in securities of China and Hong Kong.
The Asia Blue Chip Fund's investment objective is long-term capital appreciation
primarily through investments in equity securities of well-established and
sizable companies located in Asia. The Asia Small Cap Fund's investment
objective is long-term capital appreciation primarily through investments in
equity securities of smaller capitalization issuers located in Asia. The
Mainland China Fund's investment objective is long-term capital appreciation
primarily through investments in equity securities of companies which are
located in Mainland China and in companies located outside Mainland China which
have a significant part of their interests in China. The New Europe Fund's
investment objective is long-term capital appreciation primarily through
investments in the securities of companies that are either based in Europe or
that conduct their primary business activities in Europe. The Wired Index Fund's
investment objective is long-term capital appreciation primarily through
investments in the equity securities of companies that comprise the Wired Index.
The [ ] Index Fund's investment objective is long-term capital appreciation
primarily through investments in equity securities of companies that comprise
the [ ] Index. The Global Government Bond Fund's investment objective is current
income and capital appreciation through investments in government securities
issued by governments throughout the world. The objective of each Fund is a
fundamental policy and may not be changed except by a majority vote of
shareholders.
In addition to the primary investment strategies set forth in the
Prospectus, each of the China & Hong Kong Fund, Asia Blue Chip Fund, Asia Small
Cap Fund, Mainland China Fund and New Europe Fund may invest in investment grade
debt securities and may also invest up to 5% of its net assets in options on
equity securities and warrants, including those traded in the over-the-counter
markets.
- --------
/1/ "Wired Index" is a service mark, and Wired (R) is a registered trademark of
Advance Magazine Publishers, Inc. ("Advance"), used with the permission of
Advance. Wired Magazine and Advance make no representation or warranty, express
or implied, to Guinness Flight or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly or
the ability of the Wired Index to track any aspect of market performance. Wired
Magazine will continue to determine the composition of the Index without regard
to Guinness Flight or the Fund, and Wired Magazine has no obligation to take the
needs of Guinness Flight or investors in the Fund into consideration in
determining or composing the Index. ADVANCE DOES NOT GUARANTEE THE QUALITY,
ACCURACY, CURRENCY, AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED
THEREIN. ADVANCE MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE
OBTAINED BY GUINNESS FLIGHT, INVESTORS IN THE FUND, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE WIRED INDEX OR ANY DATA INCLUDED THEREIN IN
CONNECTION WITH THE FUND OR FOR ANY OTHER USE. ADVANCE MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
WIRED INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING,
IN NO EVENT SHALL ADVANCE HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT
OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
/2/ "[ ] Index" is a service mark, and [ ] (R) is a registered trademark of [ ],
which provides [ ] and other print publications. MORE COPYRIGHT DISCLOSURE FROM
TRADEMARK OWNER.
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<PAGE>
The Funds do not intend to employ leveraging techniques. Accordingly,
no Fund will purchase new securities if amounts borrowed exceed 5% of its total
assets at the time the loan is made.
When the Funds determine that adverse market conditions exist, the
Funds may adopt a temporary defensive position and invest their entire portfolio
in Money Market Instruments. In addition, the Funds may invest in Money Market
Instruments in anticipation of investing cash positions. "Money Market
Instruments" are short-term (less than twelve months to maturity) investments in
(a) obligations of the United States or foreign governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of United
States or foreign banks denominated in any currency; (c) floating rate
securities and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate commercial
paper and other short-term corporate debt obligations of United States and
foreign corporations meeting the credit quality standards set by Guinness Flight
Funds' Board of Trustees; and (e) repurchase agreements with banks and
broker-dealers with respect to such securities. While the Funds do not intend to
limit the amount of their assets invested in Money Market Instruments, except to
the extent believed necessary to achieve their investment objective, the Funds
do not expect under normal market conditions to have a substantial portion of
their assets invested in Money Market Instruments. To the extent the Funds are
invested in Money Market Instruments for defensive purposes or in anticipation
of investing cash positions, the Funds' investment objectives may not be
achieved.
The following information concerning the Funds augments the disclosure
provided in the Prospectus.
The China & Hong Kong Fund, Asia Blue Chip Fund, Asia Small Cap Fund, Mainland
China Fund, New Europe Fund, Wired Index Fund and [ ] Index Fund (the "Equity
Funds").
Guinness Flight does not intend to invest in any security in a country
where the currency is not freely convertible to United States dollars, unless it
has obtained the necessary governmental licensing to convert such currency or
other appropriately licensed or sanctioned contractual guarantee to protect such
investment against loss of that currency's external value, or Guinness Flight
has a reasonable expectation at the time the investment is made that such
governmental licensing or other appropriately licensed or sanctioned guarantee
would be obtained or that the currency in which the security is quoted would be
freely convertible at the time of any proposed sale of the security by an Equity
Fund.
An Equity Fund may invest indirectly in issuers through sponsored or
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs"), Global Depository Shares ("GDSs")
and other types of Depository Receipts (which, together with ADRs, EDRs, GDRs,
and GDSs, are hereinafter referred to as "Depository Receipts"). Depository
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the stock of unsponsored Depository Receipts are not obligated to disclose
material information in the United States and, therefore, there may not be a
correlation between such information and the market value of the Depository
Receipts. ADRs are Depository Receipts typically issued by a United States bank
or trust company which evidence ownership of underlying securities issued by a
foreign corporation. GDRs and other types of Depository Receipts are typically
issued by foreign banks or trust companies, although they also may be issued by
either a foreign or a United States corporation. Generally, Depository Receipts
in registered form are designed for use in the United States securities markets
and Depository Receipts in bearer form are designed for use in securities
markets outside the United States. For purposes of the Equity Funds' investment
policies, investments in ADRs, GDRs and other types of Depository Receipts will
be deemed to be investments in the underlying securities. Depository Receipts
other than those denominated in United States dollars will be subject to foreign
currency exchange rate risk. Certain Depository Receipts may not be listed on an
exchange and therefore may be illiquid securities.
Securities in which an Equity Fund may invest include those that are
neither listed on a stock exchange nor traded over-the-counter. As a result of
the absence of a public trading market for these securities, they
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<PAGE>
may be less liquid than publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Equity Fund or less
than what may be considered the fair value of such securities. Further,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which would be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Equity Fund may be required to bear the expenses of registration. To
the extent that such securities are illiquid by virtue of the absence of a
readily available market, or legal or contractual restrictions on resale, they
will be subject to such Equity Fund's investment restrictions on illiquid
securities, discussed below.
An Equity Fund, together with any of its "affiliated persons," as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"), may
only purchase up to 3% of the total outstanding securities of any underlying
investment company. Accordingly, when an Equity Fund or such "affiliated
persons" hold shares of any of the underlying investment companies, such Fund's
ability to invest fully in shares of those investment companies is restricted,
and Guinness Flight must then, in some instances, select alternative investments
that would not have been its first preference.
There can be no assurance that appropriate investment companies will
be available for investment. The Equity Funds do not intend to invest in such
investment companies unless, in the judgment of Guinness Flight, the potential
benefits of such investment justify the payment of any applicable premium or
sales charge.
Global Government Bond Fund
Global Government Bond Fund assets invested in foreign government
securities will be invested in debt obligations and other fixed income
securities, in each case denominated in U.S. currencies, non-U.S. currencies or
composite currencies including:
(1) debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with
taxing authority or by their agencies or instrumentalities;
(2) debt obligations of supranational entities (described
below); and
(3) debt obligations of the United States Government issued in
nondollar securities.
In making international fixed income securities investments, Guinness
Flight may consider, among other things, the relative growth and inflation rates
of different countries. Guinness Flight may also consider expected changes in
foreign currency exchange rates, including the prospects for central bank
intervention, in determining the anticipated returns of securities denominated
in foreign currencies. Guinness Flight may further evaluate, among other things,
foreign yield curves and regulatory and political factors, including the fiscal
and monetary policies of such countries.
The obligations of foreign governmental entities, including
supranational issuers (described below), have various kinds of government
support. Obligations of foreign governmental entities include obligations issued
or guaranteed by national, provincial, state or other governments with taxing
power or by their agencies. These obligations may or may not be supported by the
full faith and credit of a foreign government.
Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the InterAmerican Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves and net income.
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<PAGE>
The Global Government Bond Fund may invest in United States Government
Securities and in options, futures contracts and repurchase transactions with
respect to such securities. The term "United States Government Securities"
refers to debt securities denominated in United States dollars, issued or
guaranteed by the United States Government, by various of its agencies, or by
various instrumentalities established or sponsored by the United States
Government. Certain of these obligations, including: (1) United States Treasury
bills, notes, and bonds; (2) mortgage participation certificates guaranteed by
the Government National Mortgage Association ("GNMA"); and (3) Federal Housing
Administration debentures, are supported by the full faith and credit of the
United States. Other United States Government Securities issued or guaranteed by
Federal agencies or government sponsored enterprises are not supported by the
full faith and credit of the United States. These securities include obligations
supported by the right of the issuer to borrow from the United States Treasury,
such as obligations of Federal Home Loan Banks, and obligations supported only
by the credit of the instrumentality, such as Federal National Mortgage
Association Bonds.
When purchasing United States Government Securities, Guinness Flight
may take full advantage of the entire range of maturities of such securities and
may adjust the average maturity of the investments held in the portfolio from
time to time, depending upon its assessment of relative yields of securities of
different maturities and its expectations of future changes in interest rates.
To the extent that the Global Government Bond Fund invests in the mortgage
market, Guinness Flight usually will evaluate, among other things, relevant
economic data, environmental and security specific variables such as housing
starts, coupon and age trends. To determine relative value among markets,
Guinness Flight may use tools such as yield/duration curves, break-even
prepayment rate analysis and holding-period-return scenario testing.
The Global Government Bond Fund may seek to increase its current
income by writing covered call options with respect to some or all of the United
States Government Securities held in its portfolio. In addition, the Global
Government Bond Fund may at times, through the purchase of options on United
States Government Securities, and the purchase and sale of futures contracts and
related options with respect to United States Government Securities, seek to
reduce fluctuations in net asset value by hedging against a decline in the value
of the United States Government Securities owned by the Global Government Bond
Fund or an increase in the price of such securities which the Global Government
Bond Fund plans to purchase, although it is not the general practice to do so.
Significant option writing opportunities generally exist only with respect to
longer term United States Government Securities. Options on United States
Government Securities and futures and related options are not considered United
States Government Securities; accordingly, they have a different set of risks
and features.
The Global Government Bond Fund will not invest more than 5% of its
net assets in initial margins or premiums for the futures and options. The
Global Government Bond Fund will not invest more than 25% of its net assets in
securities issued by a single foreign government, or in supranational entities
as a group, nor invest more than 25% of its net assets in securities denominated
in a single currency other than the U.S. Dollar, British Pound Sterling,
Canadian Dollar, Euro, and Japanese Yen.
INVESTMENT STRATEGIES AND RISKS
Options and Futures Strategies
Through the writing of call options and the purchase of options and
the purchase and sale of stock index futures contracts, interest rate futures
contracts, foreign currency futures contracts and related options on such
futures contracts, Guinness Flight may at times seek to hedge against a decline
in the value of securities included in a Fund's portfolio or an increase in the
price of securities which it plans to purchase for a Fund or to reduce risk or
volatility while seeking to enhance investment performance. Expenses and losses
incurred as a result of such hedging strategies will reduce a Fund's current
return.
The ability of a Fund to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Although the Funds will not enter into an option or futures
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<PAGE>
position unless a liquid secondary market for such option or futures contract is
believed by Guinness Flight to exist, there is no assurance that a Fund will be
able to effect closing transactions at any particular time or at an acceptable
price. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation ("OCC") may not at all times be adequate to
handle current trading volume; or (vi) one or more Exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market thereon would cease to exist, although outstanding options
on that Exchange that had been issued by the OCC as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.
Low initial margin deposits made upon the opening of a futures
position and the writing of an option involve substantial leverage. As a result,
relatively small movements in the price of the contract can result in
substantial unrealized gains or losses. However, to the extent a Fund purchases
or sells futures contracts and options on futures contracts and purchases and
writes options on securities and securities indexes for hedging purposes, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities held by the Fund or decreases in the prices of securities the Fund
intends to acquire. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore, no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes stated below. Furthermore, a Fund's ability to engage in
options and futures transactions may be limited by tax considerations. Although
the Funds will only engage in options and futures transactions for limited
purposes, such transactions involve certain risks. The Funds will not engage in
options and futures transactions for leveraging purposes.
Upon purchasing futures contracts of the type described above, the
Funds will maintain in a segregated account with their Custodian cash or liquid
high grade debt obligations with a value, marked-to-market daily, at least equal
to the dollar amount of the Funds' purchase obligation, reduced by any amount
maintained as margin. Similarly, upon writing a call option, the Funds will
maintain in a segregated account with their Custodian, liquid or high grade debt
instruments with a value, marked-to-market daily, at least equal to the market
value of the underlying contract (but not less than the strike price of the call
option) reduced by any amounts maintained as margin.
Writing Covered Call Options on Securities
Call options may be used to anticipate a price increase of a security
on a more limited basis than would be possible if the security itself were
purchased. The Funds may write only covered call options. Since it can be
expected that a call option will be exercised if the market value of the
underlying security increases to a level greater than the exercise price, this
strategy will generally be used when Guinness Flight believes that the call
premium received by the Fund plus anticipated appreciation in the price of the
underlying security up to the exercise price of the call, will be greater than
the appreciation in the price of the security. By writing a call option, a Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option.
A Fund may write covered call options on optionable securities
(stocks, bonds, foreign exchange related futures, options and options on
futures) of the types in which it is permitted to invest in seeking to attain
its objective. Call options written by a Fund give the holder the right to buy
the underlying securities from the Fund at a stated exercise price. As the
writer of the call option, the Fund is obligated to own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges).
A Fund will receive a premium from writing a call option, which
increases the writer's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the
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term of the option and the volatility of the market price of the underlying
security. By writing a call option, a Fund limits its opportunity to profit from
any increase in the market value of the underlying security above the exercise
price of the option.
A Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The Fund will realize a
profit or loss from such transaction if the cost of such transaction is less or
more, respectively, than the premium received from the writing of the option.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by a Fund.
Options written by the Funds will normally have expiration dates not
more than one year from the date written. The exercise price of the options may
be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current market price of the underlying securities at
the times the options are written. A Fund may engage in buy-and-write
transactions in which the Fund simultaneously purchases a security and writes a
call option thereon. Where a call option is written against a security
subsequent to the purchase of that security, the resulting combined position is
also referred to as buy-and-write. Buy-and-write transactions using in-the-money
call options may be utilized when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. In such a transaction, a Fund's maximum gain will be the premium
received from writing the option reduced by any excess of the price paid by the
Fund for the underlying security over the exercise price. Buy-and-write
transactions using at-the-money call options may be utilized when it is expected
that the price of the underlying security will remain flat or advance moderately
during the option period. In such a transaction, a Fund's gain will be limited
to the premiums received from writing the option. Buy-and-write transactions
using out-of-the-money call options may be utilized when it is expected that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In any of the
foregoing situations, if the market price of the underlying security declines,
the amount of such decline will be offset wholly or in part by the premium
received and a Fund may or may not realize a loss.
To the extent that a secondary market is available on the Exchanges,
the covered call option writer may liquidate his position prior to the
assignment of an exercise notice by entering a closing purchase transaction for
an option of the same series as the option previously written. The cost of such
a closing purchase, plus transaction costs, may be greater than the premium
received upon writing the original option, in which event the writer will have
incurred a loss in the transaction.
Purchasing Put and Call Options on Securities
A Fund may purchase put options to protect its portfolio holdings in
an underlying security against a decline in market value. Such hedge protection
is provided during the life of the put option since the Fund, as holder of the
put option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. In order
for a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, the Funds will reduce
any profit they might otherwise have realized in the underlying security by the
premium paid for the put option and by transaction costs.
A Fund may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, the Funds will reduce
any profit they might have realized had they bought the underlying security at
the time they purchased the call option by the premium paid for the call option
and by transaction costs.
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Purchase and Sale of Options and Futures on Stock Indices
The Equity Funds may purchase and sell options on stock indices and
stock index futures as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than on price movements in
particular stocks. Currently, index options traded include the S&P 100 Index,
the S&P 500 Index, the NYSE Composite Index, the AMEX Market Value Index, the
National Over-the-Counter Index and other standard broadly based stock market
indices.
A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. For example, the China & Hong Kong Fund may invest in
Hang-Seng Index Futures. No physical delivery of securities is made.
If Guinness Flight expects general stock market prices to rise, it
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
they want ultimately to buy. If in fact the stock index does rise, the price of
the particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the Equity
Fund's index option or futures contract resulting from the increase in the
index. If, on the other hand, Guinness Flight expects general stock market
prices to decline, it might purchase a put option or sell a futures contract on
the index. If that index does in fact decline, the value of some or all of the
equity securities in the Equity Fund's portfolio may also be expected to
decline, but that decrease would be offset in part by the increase in the value
of the Fund's position in such put option or futures contract.
Purchase and Sale of Interest Rate Futures
A Fund may purchase and sell U.S. dollar interest rate futures
contracts on U.S. Treasury bills, notes and bonds and non-U.S. dollar interest
rate futures contracts on foreign bonds for the purpose of hedging fixed income
and interest sensitive securities against the adverse effects of anticipated
movements in interest rates.
A Fund may purchase futures contracts in anticipation of a decline in
interest rates when it is not fully invested in a particular market in which it
intends to make investments to gain market exposure that may in part or entirely
offset an increase in the cost of securities it intends to purchase. The Funds
do not consider purchases of futures contracts to be a speculative practice
under these circumstances. In a substantial majority of these transactions, the
Funds will purchase securities upon termination of the futures contract.
A Fund may sell U.S. dollar and non-U.S. dollar interest rate futures
contracts in anticipation of an increase in the general level of interest rates.
Generally, as interest rates rise, the market value of the fixed income
securities held by the Funds will fall, thus reducing the net asset value of the
holder. This interest rate risk can be reduced without employing futures as a
hedge by selling long-term fixed income securities and either reinvesting the
proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs to the Funds in the
form of dealer spreads and brokerage commissions.
The sale of U.S. dollar and non-U.S. dollar interest rate futures
contracts provides an alternative means of hedging against rising interest
rates. As rates increase, the value of a Fund's short position in the futures
contracts will also tend to increase, thus offsetting all or a portion of the
depreciation in the market value of the
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Fund's investments which are being hedged. While the Funds will incur commission
expenses in entering and closing out futures positions (which is done by taking
an opposite position from the one originally entered into, which operates to
terminate the position in the futures contract), commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of portfolio securities.
Options on Stock Index Futures Contracts and Interest Rate Futures Contracts
A Fund may write call options and purchase call and put options on
stock index and interest rate futures contracts. The Funds may use such options
on futures contracts in connection with their hedging strategies in lieu of
purchasing and writing options directly on the underlying securities or stock
indices or purchasing and selling the underlying futures. For example, a Fund
may purchase put options or write call options on stock index futures or
interest rate futures, rather than selling futures contracts, in anticipation of
a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options on stock index or interest rate futures,
rather than purchasing such futures, to hedge against possible increases in the
price of equity securities or debt securities, respectively, which the Fund
intends to purchase.
Purchase and Sale of Currency Futures Contracts and Related Options
In order to hedge its portfolio and to protect it against possible
variations in foreign exchange rates pending the settlement of securities
transactions, a Fund may buy or sell foreign currencies or may deal in forward
currency contracts. A Fund may also invest in currency futures contracts and
related options. If a fall in exchange rates for a particular currency is
anticipated, a Fund may sell a currency futures contract or a call option
thereon or purchase a put option on such futures contract as a hedge. If it is
anticipated that exchange rates will rise, a Fund may purchase a currency
futures contract or a call option thereon or sell (write) a put option to
protect against an increase in the price of securities denominated in a
particular currency the Fund intends to purchase. These futures contracts and
related options thereon will be used only as a hedge against anticipated
currency rate changes, and all options on currency futures written by the Funds
will be covered.
A currency futures contract sale creates an obligation by a Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. A currency futures contract
purchase creates an obligation by a Fund, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract or let the option expire.
The Funds will write (sell) only covered call options on currency
futures. This means that the Funds will provide for their obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. The Funds will, so long as they are
obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by the Funds in cash, cash
equivalents or other liquid securities in a segregated account with its
custodian. If at the close of business on any day the market value of the call
purchased by a Fund falls below 100% of the market value of the call written by
the Fund, the Fund will so segregate an amount of cash, cash equivalents or
other liquid securities equal in value to the difference. Alternatively, a Fund
may cover the call option through segregating with the custodian an amount of
the particular foreign currency equal to the amount of foreign currency per
futures contract option times the number of options written by the Fund.
If other methods of providing appropriate cover are developed, the
Funds reserve the right to employ them to the extent consistent with applicable
regulatory and exchange requirements.
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In connection with transactions in stock index options, stock index
futures, interest rate futures, foreign currency futures and related options on
such futures, the Funds will be required to deposit as "initial margin" an
amount of cash and short-term U.S. Government securities generally equal to from
5% to 10% of the contract amount. Thereafter, subsequent payments (referred to
as "variation margin") are made to and from the broker to reflect changes in the
value of the futures contract.
Options on Foreign Currencies
A Fund may write call options and purchase call and put options on
foreign currencies to enhance investment performance and for hedging purposes in
a manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized as described above. For example, a decline
in the dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if their value
in the foreign currency remains constant. In order to protect against such
diminution in the value of portfolio securities, a Fund may purchase put options
on the foreign currency. If the value of the currency does decline, the Funds
will have the right to sell such currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on its portfolio which
otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Fund may purchase call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to a Fund deriving from purchases of foreign currency options will
be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, a Fund could sustain losses on transactions in foreign
currency options which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.
Also, where a Fund anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund would be required to sell the underlying currency at a loss that may not be
offset by the amount of the premium. Through the writing of options on foreign
currencies, a Fund also may be required to forego all or a portion of the
benefits that might otherwise have been obtained from favorable movements in
exchange rates.
The Funds intend to write only covered call options on foreign
currencies. A call option written on a foreign currency by a Fund is "covered"
if the Fund owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian, which acts as the Fund's custodian, or by a designated
sub-custodian) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
or the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash, U.S. Government
Securities and other high-grade liquid debt securities in a segregated account
with its custodian or with a designated sub-custodian.
Forward Foreign Currency Exchange Contracts
A Fund may purchase or sell forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the Fund from
variations in foreign exchange rates. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date, which
is individually
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negotiated and privately traded by currency traders and their customers. A Fund
may enter into a forward contract, for example, when it enters into a contract
for the purchase or sale of a security denominated in a foreign currency in
order to "lock in" the U.S. dollar price of the security ("transaction hedge").
Additionally, for example, when a Fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency approximating
the value of some or all of the Fund's securities denominated in such foreign
currency, or when a Fund believes that the U.S. dollar may suffer a substantial
decline against foreign currency, it may enter into a forward purchase contract
to buy that foreign currency for a fixed dollar amount ("position hedge"). In
this situation, the Fund may, in the alternative, enter into a forward contract
to sell a different foreign currency for a fixed U.S. dollar amount where it
believes that the U.S. dollar value of the currency to be sold pursuant to the
forward contract will fall whenever there is a decline in the U.S. dollar value
of the currency in which portfolio securities of the sector are denominated
("cross-hedge"). If a Fund enters into a position hedging transaction, cash not
available for investment or U.S. Government Securities or other high quality
debt securities will be placed in a segregated account in an amount sufficient
to cover the Fund's net liability under such hedging transactions. If the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to its position hedging
transactions. As an alternative to maintaining all or part of the separate
account, a Fund may purchase a call option permitting it to purchase the amount
of foreign currency being hedged by a forward sale contract at a price no higher
than the forward contract price or a Fund may purchase a put option permitting
it to sell the amount of foreign currency subject to a forward purchase contract
at a price as high or higher than the forward contract price. Unanticipated
changes in currency prices would result in lower overall performance for a Fund
than if it had not entered into such contracts.
Generally, the Funds will not enter into a forward foreign currency
exchange contract with a term of greater than one year. At the maturity of the
contract, a Fund may either sell the portfolio security and make delivery of the
foreign currency, or may retain the security and terminate the obligation to
deliver the foreign currency by purchasing an "offsetting" forward contract with
the same currency trader obligating the Fund to purchase, on the same maturity
date, the same amount of foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for a Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or a loss (as described below) to the extent
that there has been movement in forward contract prices. If a Fund engages in an
offsetting transaction, it may subsequently enter into a new forward contract to
sell the foreign currency. Should forward prices decline during the period
between entering into a forward contract for the sale of a foreign currency and
the date the Fund enters into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the price of the
currency the Fund has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Fund will suffer a loss
to the extent the price of the currency the Fund has agreed to purchase exceeds
the price of the currency the Fund has agreed to sell.
The Funds' dealing in forward foreign currency exchange contracts will
be limited to the transactions described above. Of course, a Fund is not
required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
Guinness Flight. It also should be realized that this method of protecting the
value of a Fund's portfolio securities against the decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that one can achieve at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain that might result should
the value of such currency increase.
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Additional Risks of Futures Contracts and Related Options, Forward Foreign
Currency Exchange Contracts and Options on Foreign Currencies
The market prices of futures contracts may be affected by certain
factors. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the securities
and futures markets. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions.
In addition, futures contracts in which a Fund may invest may be
subject to commodity exchange imposed limitations on fluctuations in futures
contract prices during a single day. Such regulations are referred to as "daily
price fluctuation limits" or "daily limits." During a single trading day no
trades may be executed at prices beyond the daily limit. Once the price of a
futures contract has increased or decreased by an amount equal to the daily
limit, positions in those futures cannot be taken or liquidated unless both a
buyer and seller are willing to effect trades at or within the limit. Daily
limits, or regulatory intervention in the commodity markets, could prevent a
Fund from promptly liquidating unfavorable positions and adversely affect
operations and profitability.
Options on foreign currencies and forward foreign currency exchange
contracts ("forward contracts") are not traded on contract markets regulated by
the Commodity Futures Trading Commission ("CFTC") and are not regulated by the
SEC. Rather, forward currency contracts are traded through financial
institutions acting as market makers. Foreign currency options are traded on
certain national securities exchanges, such as the Philadelphia Stock Exchange
and the Chicago Board Options Exchange, subject to SEC regulation. In the
forward currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the OCC, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may exist, potentially permitting a Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign currency option exercises, or would
result in undue burdens on the OCC or its clearing member, impose special
procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, futures contracts and related options and forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in a Fund's ability to act upon economic events occurring
in foreign markets during nonbusiness hours in the United States and the United
Kingdom, (d) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (e) lesser
trading volume.
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Forward Commitments
The Funds may make contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments")
because new issues of securities are typically offered to investors, such as the
Funds, on that basis. Forward commitments involve a risk of loss if the value of
the security to be purchased declines prior to the settlement date. Although the
Funds will enter into such contracts with the intention of acquiring the
securities, the Funds may dispose of a commitment prior to a settlement date if
Guinness Flight deems it appropriate to do so. A Fund may realize short-term
profits or losses upon the sale of forward commitments.
Regulatory Matters
In connection with its proposed futures and options transactions, each
Fund will file with the CFTC a notice of eligibility for exemption from the
definition of (and therefore from CFTC regulation as) a "commodity pool
operator" under the Commodity Exchange Act.
The Staff of the SEC has taken the position that the purchase and sale
of futures contracts and the writing of related options may involve senior
securities for the purposes of the restrictions contained in Section 18 of the
1940 Act on investment companies issuing senior securities. However, the Staff
has issued letters declaring that it will not recommend enforcement action under
Section 18 if an investment company:
(i) sells futures contracts on an index of securities
that correlate with its portfolio securities to
offset expected declines in the value of its
portfolio securities;
(ii) writes call options on futures contracts, stock
indexes or other securities, provided that such
options are covered by the investment company's
holding of a corresponding long futures position,
by its ownership of portfolio securities which
correlate with the underlying stock index, or
otherwise;
(iii) purchases futures contracts, provided the
investment company establishes a segregated
account ("cash segregated account") consisting of
cash or cash equivalents in an amount equal to the
total market value of such futures contracts less
the initial margin deposited therefor; and
(iv) writes put options on futures contracts, stock
indices or other securities, provided that such
options are covered by the investment company's
holding of a corresponding short futures position,
by establishing a cash segregated account in an
amount equal to the value of its obligation under
the option, or otherwise.
In addition, the Funds are eligible for, and are claiming, exclusion
from the definition of the term Commodity Pool Operator in connection with the
operations of the Funds, in accordance with subparagraph (1) of paragraph (a) of
CFTC Rule 4.5, because each Fund represents that it will operate in a manner
such that:
(i) each Fund will use commodity futures or commodity options
contracts solely for bona fide hedging purposes within the meaning and
intent of Commission Rule 1.3(z)(1); provided, however, that in
addition, with respect to positions in commodity futures or commodity
option contracts which do not come within the meaning and intent of
Rule 1.3(z)(1), each Fund will not enter into commodity futures and
commodity options contracts for which the aggregate initial margin and
premiums exceed five (5) percent of the fair market value of the Fund's
assets, after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; and, provided
further, that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount as defined in Commission Rule
190.01(x) may be excluded in computing such five (5) percent;
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(ii) each Fund will not be, and has not been, marketing
participations to the public as or in a commodity pool or otherwise as
or in a vehicle for trading in the commodity futures or commodity
options markets;
(iii) each Fund will disclose in writing to each prospective
participant the purpose of and the limitations on the scope of the
commodity futures and commodity options trading in which the Fund
intends to engage; and
(iv) each Fund will submit to such special calls as the
Commission may make to require the Fund to demonstrate compliance with
the provisions of Commission Rule 4.5(c).
The Funds will conduct their purchases and sales of futures contracts
and writing of related options transactions in accordance with the foregoing.
Repurchase Agreements
A Fund may enter into repurchase agreements. Under a repurchase
agreement, a Fund acquires a debt instrument for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the Fund to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an agreed
upon market interest rate effective for the period of time during which the
Fund's money is invested. A Fund's risk is limited to the ability of the seller
to pay the agreed upon sum upon the delivery date. When a Fund enters into a
repurchase agreement, it obtains collateral having a value at least equal to the
amount of the purchase price. Repurchase agreements can be considered loans as
defined by the 1940 Act, collateralized by the underlying securities. The return
on the collateral may be more or less than that from the repurchase agreement.
The securities underlying a repurchase agreement will be marked to market every
business day so that the value of the collateral is at least equal to the value
of the loan, including the accrued interest earned. In evaluating whether to
enter into a repurchase agreement, Guinness Flight will carefully consider the
creditworthiness of the seller. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the Fund may incur a
loss.
Illiquid and Restricted Securities
The Funds have adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The Funds will not invest in
illiquid securities if immediately after such investment more than 15% of a
Fund's net assets (taken at market value) would be invested in such securities.
For this purpose, illiquid securities include (a) securities that are illiquid
by virtue of the absence of a readily available market or legal or contractual
restrictions on resale, (b) participation interests in loans that are not
subject to puts, (c) covered call options on portfolio securities written by a
Fund over-the-counter and the cover for such options and (d) repurchase
agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered for sale to the public, securities that are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a mutual fund might be
unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty in satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
Although securities which may be resold only to "qualified
institutional buyers" in accordance with the provisions of Rule 144A under the
Securities Act of 1933, as amended, are technically considered "restricted
securities", the Funds may purchase Rule 144A securities without regard to the
limitation on investments in illiquid securities described above, provided that
a determination is made that such securities have a readily
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available trading market. Guinness Flight will determine the liquidity of Rule
144A securities under the supervision of the Funds' Board of Trustees. The
liquidity of Rule 144A securities will be monitored by Guinness Flight, and if
as a result of changed conditions, it is determined that a Rule 144A security is
no longer liquid, a Fund's holdings of illiquid securities will be reviewed to
determine what, if any, action is required to assure that the Fund does not
exceed its applicable percentage limitation for investments in illiquid
securities.
In reaching a liquidity decision, Guinness Flight will consider, among
other things, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
OTHER RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should recognize that investing in securities of companies
in emerging market countries involves certain special considerations and risk
factors which are not typically associated with investing in securities of U.S.
companies. The following disclosure augments the information provided in the
prospectus.
Economic and Political Risks
The economies of foreign countries may differ unfavorably from the
United States economy in such respects as, but not limited to, growth of
domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment positions. Further, economies of foreign
countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by the economic
conditions of the countries in which they trade, as well as trade barriers,
managed adjustments in relative currency values and other protectionist measures
imposed or negotiated by such countries.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulations, social instability or diplomatic developments (including
war) which could adversely affect the economies of such countries or the Funds'
investments in those countries. In addition, it may be more difficult to obtain
a judgment in a court outside the United States.
China Political Risks
The Chinese economy previously operated as a Socialist economic
system, relying heavily upon government planning from 1949, the year in which
the Communists seized power, to 1978, the year Deng Xiaoping instituted his
first economic reforms.
Economic reforms in China are transforming its economy into a market
system that has stimulated significant economic growth. As a result of such
reform, the living standards of the 800 million rural workers have improved.
Farm reform led to the doubling of China's farmers' incomes over the 1980's. The
next stage of reform gave rise to small scale entrepreneurs and stimulated light
and medium industry. In addition, a cheap and abundant supply of labor has
attracted foreign investment in China. Special Economic Zones, five originally
and over thirty today, were set up, providing tax advantages to foreign
investors. Further, the Shenzhen and Shanghai Stock Exchanges have recently
opened. Class "A" and Class "B" shares are traded on both exchanges. While only
resident Chinese can purchase Class "A" shares, foreign investors (such as the
Funds) can purchase Class "B" shares. Over the period 1978 to 1997, China's
gross domestic product grew between 9% and 10% per annum. By 1995, China had
become one of the world's major trading nations. The World Bank forecasts that
China will have the world's largest economy by 2003.
In 1984, China and Britain signed the Joint Declaration, which allowed
for the termination of British rule in Hong Kong on June 30, 1997, but which
maintains the previously existing capitalist economic and social system of Hong
Kong for 50 years beyond that date. Obviously, there are risks arising from Hong
Kong's
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return to China under the "one country two systems" proposal. However, Hong Kong
and China are interdependent; 70% of foreign investment in China is from Hong
Kong and China has large shareholdings in Hong Kong companies. Guinness Flight
believes that China is unlikely to damage the Hong Kong economy and destroy the
value of their investments. Today, Hong Kong's stock market is one of the
largest in the world and is highly liquid and extensively regulated.
Notwithstanding the beliefs of Guinness Flight, investors should
realize that there are significant risks to investing in China and Hong Kong.
The risks include:
(1) that political instability may arise as a result of
indecisive leadership;
(2) that hard line Marxist Leninists might regain the political
initiative;
(3) that social tensions caused by widely differing levels of
economic prosperity within Chinese society might create
unrest, as they did in the tragic events of 1989,
culminating in the Tiananmen Square incident; and
(4) that the threat of armed conflict exists over the unresolved
situation concerning Taiwan.
Investors should further realize that the central government of China
is communist and, while a liberal attitude towards foreign investment and
capitalism prevails at present, a return to hard line communism and a reaction
against capitalism and the introduction of restrictions on foreign investment is
a possibility. There can be no assurance that the Chinese government will
continue to pursue its economic reform policies or, if it does, that those
policies will be successful. The issue of "B" shares, "H" shares and "N" shares
by Chinese companies and the ability to obtain a "back-door listing" through Red
Chips is still regarded by the Chinese authorities as an experiment in economic
reform. The reformist elements which now dominate Chinese policies remain
ideologically communist and political factors may, at any time, outweigh
economic policies and the encouragement of foreign investment. The Funds will be
highly sensitive to any significant change in political, social or economic
policy in China. Such sensitivity may, for the reasons specified above,
adversely affect the capital growth and thus the performance of the Funds.
Guinness Flight, however, believes that the process of reform has now gone too
far to be easily reversed.
INVESTMENT IN CHINA AT PRESENT INVOLVES ABOVE AVERAGE RISK DUE TO A NUMBER OF
SPECIAL FACTORS DESCRIBED HEREIN. INVESTMENT IN THE FUNDS SHOULD BE REGARDED AS
LONG TERM IN NATURE. THE FUNDS ARE SUITABLE ONLY FOR THOSE INVESTORS WHO CAN
AFFORD THE RISKS INVOLVED AND SHOULD CONSTITUTE ONLY A LIMITED PART OF AN
INVESTOR'S PORTFOLIO. THE PRICE OF THE FUNDS MAY EXPERIENCE SIGNIFICANT
FLUCTUATIONS.
Securities Market Risks
In general, trading volume on foreign stock exchanges is substantially
less than that on the New York Stock Exchange. Further, securities of some
foreign companies are less liquid and more volatile than securities of
comparable United States companies. Securities without a readily available
market will be treated as illiquid securities for purposes of the Funds'
limitations on such purchases. Similarly, volume and liquidity in most foreign
bond markets can be substantially less than in the United States, and
consequently, volatility of price can be greater than in the United States.
Fixed commissions on foreign markets are generally higher than negotiated
commissions on United States exchanges; however, the Funds will endeavor to
achieve the most favorable net results on their portfolio transactions and may
be able to purchase the securities in which the Funds may invest on other stock
exchanges where commissions are negotiable.
With regard to China, both the Shanghai and the Shenzhen securities
markets are in their infancy and are undergoing a period of development and
change. This may lead to trading volatility, difficulty in the
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<PAGE>
settlement and recording of transactions and difficulty in interpreting and
applying the relevant regulations. In addition, the choice of investments
available to the Funds will be severely limited as compared with the choice
available in other markets due to the small but increasing number of "B" share,
"H" share, "N" share and Red Chip issues currently available. There is a low
level of liquidity in the Chinese securities markets, which are relatively small
in terms of both combined total market value and the number of "B" shares, "H"
shares, "N" shares and Red Chips available for investment. Shareholders are
warned that this could lead to severe price volatility.
Small Capitalization Issuers
Investors should be aware that investments in small capitalization
issuers carry more risk than investments in issuers with market capitalizations
greater than $1 billion. Generally, small companies rely on limited product
lines, financial resources, and business activities that make them more
susceptible to setbacks or downturns. In addition, the stock of such companies
may be more thinly traded. Accordingly, the performance of small capitalization
issuers may be more volatile.
Interest Rate Fluctuations
Generally, the value of fixed income securities will change as
interest rates fluctuate. During periods of falling interest rates, the values
of outstanding long-term debt obligations generally rise. Conversely, during
periods of rising interest rates, the value of such securities generally
declines. The magnitude of these fluctuations generally will be greater for
securities with longer maturities.
Governmental Credit Risk
The obligations of foreign government entities, including
supranational issuers, have various kinds of government support. Although
obligations of foreign governmental entities include obligations issued or
guaranteed by national, provincial, state or other government with taxing power,
or by their agencies, these obligations may or may not be supported by the full
faith and credit of a foreign government.
Accounting Standards and Legal Framework
Many foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards, practices and
disclosure requirements comparable to those applicable to United States
companies. Consequently, there may be less publicly available information about
such companies than about United States companies. Further, there is generally
less governmental supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States.
With regard to China, the national regulatory and legal framework for
capital markets and joint stock companies is not well developed compared to
those of Western countries. Certain matters of concern to foreign shareholders
are not adequately dealt with or are only covered in a number of national and
local laws and regulations. As the efficacy of such laws and regulations is as
yet uncertain, there can be no assurance as to the extent to which rights of
foreign shareholders will be protected.
Further, Chinese companies are not required to follow international
accounting standards. There are a number of differences between international
accounting standards and accounting practice in China, including the valuation
of property and other assets (in particular inventory and investments and
provisions against debtors), accounting for depreciation, consolidation,
deferred taxation and contingencies and the treatment of exchange differences.
There may, therefore, be significant differences in the preparation of financial
statements by accountants following Chinese accounting standards and practices
when compared with those prepared in accordance with international accounting
standards. All issuers of "B" shares, "H" shares, "N" shares and Red Chips are,
however, required to produce accounts which are prepared in accordance with
international accounting standards.
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<PAGE>
Additional Foreign Currency Considerations
The Funds' assets will be invested principally in securities of
entities in foreign markets and substantially all of the income received by the
Funds will be in foreign currencies. If the value of the foreign currencies in
which a Fund receives its income falls relative to the U.S. dollar between the
earning of the income and the time at which the Fund converts the foreign
currencies to U.S. dollars, the Fund will be required to liquidate securities in
order to make distributions if the Fund has insufficient cash in U.S. dollars to
meet distribution requirements. The liquidation of investments, if required, may
have an adverse impact on a Fund's performance.
Changes in foreign currency exchange rates also will affect the value
of securities in the Funds' portfolios and the unrealized appreciation or
depreciation of investments. Further, a Fund may incur costs in connection with
conversions between various currencies. Foreign exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to a Fund at one rate, while offering a lesser rate of exchange should
the Fund desire immediately to resell that currency to the dealer. The Funds
will conduct their foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward, futures or options contracts to
purchase or sell foreign currencies.
A Fund may enter into forward currency exchange contracts and currency
futures contracts and options on such futures contracts, as well as purchase put
or call options on currencies, in U.S. or foreign markets to protect the value
of some portion or all of its portfolio holdings against currency risks by
engaging in hedging transactions. There can be no guarantee that instruments
suitable for hedging currency or market shifts will be available at the time
when a Fund wishes to use them. Moreover, investors should be aware that in most
emerging market countries, such as China, the markets for certain of these
hedging instruments are not highly developed and that in many emerging market
countries no such markets currently exist.
Investment Funds and Repatriation Restrictions
Some foreign countries have laws and regulations which currently
preclude direct foreign investment in the securities of their companies.
However, indirect foreign investment in the securities listed and traded on the
stock exchanges in these countries is permitted by certain foreign countries
through investment funds which have been specially authorized. See "Tax Matters"
for an additional discussion concerning such investments. The Funds may invest
in these investment funds; however, if the acquired investment fund is
registered pursuant to the 1940 Act, then the acquiring Fund may not own (i)
more than three percent of the total outstanding voting stock of the acquired
investment fund, (ii) securities issued by the acquired investment fund having
an aggregate value of more than five percent of the total assets of the Fund, or
(iii) securities issued by the acquired investment fund and all other registered
investment funds having an aggregate value of more than 10 percent of the total
assets of the Fund. If a Fund invests in such investment funds, the Fund's
shareholders will bear not only their proportionate share of the expenses of the
Fund, but also will bear indirectly similar expenses of the underlying
investment funds. Guinness Flight has agreed to waive its management fees with
respect to the portion of a Fund's assets invested in shares of other open-end
investment companies. A Fund would continue to pay its own management fees and
other expenses with respect to its investments in shares of closed-end
investment companies.
In addition to the foregoing investment restrictions, prior
governmental approval for foreign investments may be required under certain
circumstances in some foreign countries, and the extent of foreign investment in
foreign companies may be subject to limitation. Foreign ownership limitations
also may be imposed by the charters of individual companies to prevent, among
other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales
by foreign investors may require governmental registration and/or approval in
some foreign countries. A Fund could be adversely affected by delays in or a
refusal to grant any required governmental approval for such repatriation.
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<PAGE>
INVESTMENT RESTRICTIONS AND POLICIES
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of a Fund. As used in the Prospectus and Statement of
Additional Information, the term "majority of the outstanding shares" of a Fund
means, respectively, the vote of the lesser of (i) 67% or more of the shares of
the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. The following are the Funds'
investment restrictions set forth in their entirety. Investment policies are not
fundamental and may be changed by the Board of Trustees without shareholder
approval.
Investment Restrictions
Each Fund may not:
1. Issue senior securities, except that a Fund may borrow up to 33
1/3% of the value of its total assets from a bank (i) to increase its holdings
of portfolio securities, (ii) to meet redemption requests, or (iii) for such
short-term credits as may be necessary for the clearance or settlement of the
transactions. A Fund may pledge its assets to secure such borrowings.
2. Invest 25% or more of the total value of its assets in a particular
industry, except that this restriction shall not apply to U.S. Government
Securities.
3. Buy or sell commodities or commodity contracts or real estate or
interests in real estate (including real estate limited partnerships), except
that it may purchase and sell futures contracts on stock indices, interest rate
instruments and foreign currencies, securities which are secured by real estate
or commodities, and securities of companies which invest or deal in real estate
or commodities.
4. Make loans, except through repurchase agreements to the extent
permitted under applicable law.
5. Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under applicable securities laws.
Investment Policies
Each Fund may not:
1. Purchase securities on margin, except such short-term credits as
may be necessary for clearance of transactions and the maintenance of margin
with respect to futures contracts.
2. Make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in foreign currency contracts,
options and futures contracts).
3. Purchase or otherwise acquire the securities of any open-end
investment company (except in connection with a merger, consolidation,
acquisition of substantially all of the assets or reorganization of another
investment company) if, as a result, the Fund and all of its affiliates would
own more than 3% of the total outstanding stock of that company.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
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<PAGE>
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the Funds by Guinness Flight subject to the supervision of the
Guinness Flight Funds and the Board of Trustees and pursuant to authority
contained in the Investment Advisory Agreement between the Funds and Guinness
Flight. In selecting brokers or dealers, Guinness Flight will consider various
relevant factors, including, but not limited to: the best net price available,
the size and type of the transaction, the nature and character of the markets
for the security to be purchased or sold, the execution efficiency, settlement
capability, financial condition of the broker-dealer firm, the broker-dealer's
execution services rendered on a continuing basis and the reasonableness of any
commissions.
In addition to meeting the primary requirements of execution and
price, brokers or dealers may be selected who provide research services, or
statistical material or other services to a Fund or to Guinness Flight for the
Fund's use, which in the opinion of the Board of Trustees, are reasonable and
necessary to the Fund's normal operations. Those services may include economic
studies, industry studies, security analysis or reports, sales literature and
statistical services furnished either directly to a Fund or to Guinness Flight.
Such allocation shall be in such amounts as Guinness Flight Funds shall
determine and Guinness Flight shall report regularly to Guinness Flight Funds
who will in turn report to the Board of Trustees on the allocation of brokerage
for such services.
The receipt of research from brokers or dealers may be useful to
Guinness Flight in rendering investment management services to its other
clients, and conversely, such information provided by brokers or dealers who
have executed orders on behalf of Guinness Flight's other clients may be useful
to Guinness Flight in carrying out its obligations to the Funds. The receipt of
such research may not reduce Guinness Flight's normal independent research
activities.
Guinness Flight is authorized to place portfolio transactions with
brokerage firms that have provided assistance in the distribution of shares of
the Funds and is authorized to use the Funds' Distributor on an agency basis, to
effect a substantial amount of the portfolio transactions which are executed on
the New York or American Stock Exchanges, Regional Exchanges and Foreign
Exchanges where relevant, or which are traded in the over-the-counter market.
Brokers or dealers who execute portfolio transactions on behalf of a
Fund may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions provided Guinness Flight Funds determines in good faith that such
commissions are reasonable in relation to the value of the brokerage and/or
research services provided by such executing brokers or dealers viewed in terms
of a particular transaction or Guinness Flight's overall responsibilities to a
Fund.
It may happen that the same security will be held by other clients of
Guinness Flight. When the other clients are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts will be allocated
in accordance with a formula considered by Guinness Flight to be equitable to
each, taking into consideration such factors as size of account, concentration
of holdings, investment objectives, tax status, cash availability, purchase
cost, holding period and other pertinent factors relative to each account. In
some cases this system could have a detrimental effect on the price or volume of
the security as far as a Fund is concerned. In other cases, however, the ability
of a Fund to participate in volume transactions will produce better executions
for the Fund.
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<PAGE>
Brokerage commissions paid by the Funds were as follows:
<TABLE>
<CAPTION>
Year Ended Asia Blue Asia Small China & Hong Mainland
December 31, Chip Fund Cap Fund Kong Fund China Fund
- ------------ --------- -------- ---- ----------
<S> <C> <C> <C> <C>
1997 $37,794 $1,271,036 $714,450 $18,313/3/
1996 $23,303/4/ $204,067/4/ $736,492 --
1995 -- -- $258,319 --
</TABLE>
The increase in Asia Small Cap Fund's brokerage commissions in 1997 is primarily
due to volatile Asian equity markets in 1997.
COMPUTATION OF NET ASSET VALUE
The net asset value of the Funds is determined at 4:00 p.m. New York
time, on each day that the New York Stock Exchange is open for business and on
such other days as there is sufficient trading in a Fund's securities to affect
materially the net asset value per share of the Fund. The Funds will be closed
on New Years Day, Presidents' Day, Martin Luther King, Jr.'s Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Funds will invest in foreign securities, and as a result, the
calculation of the Funds' net asset value may not take place contemporaneously
with the determination of the prices of certain of the portfolio securities used
in the calculation. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of a Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities may be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Board of
Trustees. Portfolio securities of a Fund that are traded both on an exchange and
in the over-the-counter market will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of the currencies against U.S. Dollars as last
quoted by any recognized dealer. When portfolio securities are traded, the
valuation will be the last reported sale price on the day of valuation. (For
securities traded on the New York Stock Exchange, the valuation will be the last
reported sales price as of the close of the Exchange's regular trading session,
currently 4:00 p.m. New York time.) If there is no such reported sale or the
valuation is based on the over-the-counter market, the securities will be valued
at the last available bid price or at the mean between the bid and asked prices,
as determined by the Board of Trustees. As of the date of this Statement of
Additional Information, such securities will be valued by the latter method.
Securities for which reliable quotations are not readily available and all other
assets will be valued at their respective fair market value as determined in
good faith by, or under procedures established by, the Board of Trustees of the
Funds.
Money market instruments with less than sixty days remaining to
maturity when acquired by the Funds will be valued on an amortized cost basis by
the Funds, excluding unrealized gains or losses thereon from the
- ------------
/3/ For the period 11/3/97 (commencement of operations) to 12/31/97.
/4/ For the period 4/29/96 (commencement of operations) to 12/31/96.
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<PAGE>
valuation. This is accomplished by valuing the security at cost and then
assuming a constant amortization to maturity of any premium or discount. If a
Fund acquires a money market instrument with more than sixty days remaining to
its maturity, it will be valued at current market value until the 60th day prior
to maturity, and will then be valued on an amortized cost basis based upon the
value on such date unless the Board of Trustees determines during such 60 day
period that this amortized cost value does not represent fair market value.
All liabilities incurred or accrued are deducted from a Fund's total
assets. The resulting net assets are divided by the number of shares of the Fund
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of a Fund to
that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the Fund. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)^n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods or at the end of the
1, 5 or 10 year periods (or fractional
portion thereof)
In calculating the ending redeemable value, all dividends and
distributions by a Fund are assumed to have been reinvested at net asset value
as described in the prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the 1, 5 and 10 year periods (or
fractional portion thereof) that would equate the initial amount invested to the
ending redeemable value.
A Fund may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing a Fund's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the Fund calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. Such alternative total return information will be given no greater
prominence in such advertising than the information prescribed under the
Commission's rules.
In addition to the total return quotations discussed above, a Fund may
advertise its yield based on a 30 day (or one month) period ended on the date of
the most recent balance sheet included in the Fund's Post-Effective Amendment to
its Registration Statement, computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
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<PAGE>
YIELD = 2[(ab +1)^61]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
Under this formula, interest earned on debt obligations for purposes
of "a" above, is calculated by (1) computing the yield to maturity of each
obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the Fund's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30 day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Undeclared earned income, computed in accordance with
generally accepted accounting principles, may be subtracted from the maximum
offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the SEC's rules. In
addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
The annual compounded rate of total return for the one year period
ended December 31, 1997 and the average annual compounded rate of total return
from June 30, 1994 (inception) to December 31, 1997 for the China & Hong Kong
Fund was -20.34% and 5.07%, respectively, and for the Global Government Bond
Fund was 2.87% and 5.88%, respectively. The annual compounded rate of total
return for the one-year period ended December 31, 1997 and the average annual
compounded rate of total return from April 29, 1996 (inception) to December 31,
1997 for the Asia Blue Chip Fund was -37.68% and -22.90%, respectively, and for
the Asia Small Cap Fund was -30.77 and -13.60%, respectively. The total return
for the period from November 3, 1997 (inception) to December 31, 1997 for the
Mainland China Fund was -5.50%. For the 30 day period ended December 31, 1997,
the Global Government Bond Fund's yield was 4.90%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds have elected to be governed by Rule 18f-1 of the 1940 Act,
under which a Fund is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the Fund or $250,000
during any 90 day period. Should any shareholder's redemption exceed this
limitation, a Fund can, at its sole option, redeem the excess in cash or in
readily marketable portfolio securities. Such securities would be selected
solely by the Fund and valued as in computing net asset value. In these
circumstances a shareholder selling such securities would probably incur a
brokerage charge and there can be no assurance that the price realized by a
shareholder upon the sale of such securities will not be less than the value
used in computing net asset value for the purpose of such redemption.
Each Fund has authorized one or more brokers to accept on its behalf
purchase and redemption orders. Such brokers are authorized to designate
intermediaries to accept orders on the Fund's behalf. Each Fund
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<PAGE>
will be deemed to have received the order when an authorized broker or broker
authorized designee accepts the order. Customer orders will be priced at the
Fund's net asset value next computed after they are accepted by an authorized
broker or the broker authorized designee.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting each Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of each Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company
for federal income tax purposes under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). As a regulated investment company, a Fund is
not subject to federal income tax on the portion of its net investment income
(i.e., taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains over
capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described below.
Distributions by a Fund made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year, will be
considered distributions of income and gains of the taxable year and will
therefore count toward satisfaction of the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement").
In general, gain or loss recognized by a Fund on the disposition of an
asset will be a capital gain or loss. In addition, gain will be recognized as a
result of certain constructive sales, including short sales "against the box."
However, gain recognized on the disposition of a debt obligation purchased by a
Fund at a market discount (generally, at a price less than its principal amount)
will be treated as ordinary income to the extent of the portion of the market
discount which accrued during the period of time the Fund held the debt
obligation. In addition, under the rules of Code section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent attributable
to changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code Section 1256
(unless a Fund elects otherwise), will generally be treated as ordinary income
or loss.
In general, for purposes of determining whether capital gain or loss
recognized by a Fund on the disposition of an asset is long-term or short-term,
the holding period of the asset may be affected if (as applicable, depending on
the type of the Fund) (1) the asset is used to close a "short sale" (which
includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, or (2) the asset is otherwise
held by the Fund as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Fund grants a qualified covered call
option (which, among other things, must not be deep-in-the-money) with respect
thereto) or (3) the asset is stock and the Fund grants an in-the-money qualified
covered call option with respect thereto. In addition, a Fund may be required to
defer the recognition of a loss on the disposition of an asset held as part of a
straddle to the extent of any unrecognized gain on the offsetting position.
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<PAGE>
Any gain recognized by a Fund on the lapse of, or any gain or loss
recognized by a Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of a Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
the Fund and a contemporaneous contract to sell substantially identical property
in the future; (2) the transaction is a straddle within the meaning of section
1092 of the Code; (3) the transaction is one that was marketed or sold to the
Fund on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain; or (4) the transaction
is described as a conversion transaction in the Treasury Regulations. The amount
of the gain that is recharacterized generally will not exceed the amount of the
interest that would have accrued on the net investment for the relevant period
at a yield equal to 120% of the federal long-term, mid-term, or short-term rate,
depending upon the type of instrument at issue, reduced by an amount equal to:
(1) prior inclusions of ordinary income items from the conversion transaction
and (2) the capital interest on acquisition indebtedness under Code section
263(g). Built-in losses will be preserved where the Fund has a built-in loss
with respect to property that becomes a part of a conversion transaction. No
authority exists that indicates that the converted character of the income will
not be passed through to the Fund's shareholders.
Certain transactions that may be engaged in by a Fund (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
that taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. A Fund, however,
may elect not to have this special tax treatment apply to Section 1256 contracts
that are part of a "mixed straddle" with other investments of the Fund that are
not Section 1256 contracts.
A Fund may purchase securities of certain foreign investment funds or
trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If a Fund invests in a PFIC, it has three separate
options. First, it may elect to treat the PFIC as a qualifying electing fund (a
"QEF"), in which case it will each year have ordinary income equal to its pro
rata share of the PFIC's ordinary earnings for the year and long-term capital
gain equal to its pro rata share of the PFIC's net capital gain for the year,
regardless of whether the Fund receives distributions of any such ordinary
earnings or capital gains from the PFIC. Second, for tax years beginning after
December 31, 1997, the Fund may make a mark-to-market election with respect to
its PFIC stock. Pursuant to such an election, the Fund will include as ordinary
income any excess of the fair market value of such stock at the close of any
taxable year over its adjusted tax basis in the stock. If the adjusted tax basis
of the PFIC stock exceeds the fair market value of such stock at the end of a
given taxable year, such excess will be deductible as ordinary loss in the
amount equal to the lesser of the amount of such excess or the net
mark-to-market gains on the stock that the Fund included in income in previous
years. The Fund's holding period with respect to its PFIC stock subject to the
election will commence on the first day of the following taxable year. If the
Fund makes the mark-to-market election in the first taxable year it holds PFIC
stock, it will not incur the tax described below under the third option.
Finally, if the Fund does not elect to treat the PFIC as a QEF and
does not make a mark-to-market election, then, in general, (1) any gain
recognized by the Fund upon a sale or other disposition of its interest in the
PFIC or any "excess distribution" (as defined) received by the Fund from the
PFIC will be allocated ratably over the Fund's holding period in the PFIC stock,
(2) the portion of such gain or excess distribution so allocated to the year in
which the gain is recognized or the excess distribution is received shall be
included in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable as an
ordinary income dividend, but such portion will not be subject to tax at the
Fund level), (3) the Fund shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each
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<PAGE>
such prior year, (i) the amount of gain or excess distribution allocated to such
prior year multiplied by the highest tax rate (individual or corporate, as the
case may be) in effect for such prior year, plus (ii) interest on the amount
determined under clause (i) for the period from the due date for filing a return
for such prior year until the date for filing a return for the year in which the
gain is recognized or the excess distribution is received, at the rates and
methods applicable to underpayments of tax for such period, and (4) the
distribution by the Fund to shareholders of the portions of such gain or excess
distribution so allocated to prior years (net of the tax payable by the Fund
thereon) will again be taxable to the shareholders as an ordinary income
dividend.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it made a taxable year election for excise
tax purposes as discussed below) to treat all or any part of any net capital
loss, any net long-term capital loss or any net foreign currency loss
(including, to the extent provided in Treasury Regulations, losses recognized
pursuant to the PFIC mark-to-market election) incurred after October 31 as if it
had been incurred in the succeeding year.
In addition to satisfying the requirements described above, a Fund
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to each of which the
Fund has not invested more than 5% of the value of the Fund's total assets in
securities of such issuer and does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security not the issuer of the option.
If for any taxable year a Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses and ordinary gains or losses arising as a
result of a PFIC mark-to-market election (or upon an actual disposition of the
PFIC stock subject to such election) incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that a Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
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<PAGE>
Fund Distributions
Each Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they generally should not qualify for the 70%
dividends-received deduction for corporate shareholders.
A Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. Each Fund currently intends to distribute any such
amounts. Net capital gain that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by a Fund prior to the date on which the shareholder acquired his
shares.
Conversely, if a Fund elects to retain its net capital gain, the Fund
will be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each such
shareholder received a distribution of his pro rata share of such gain, with the
result that each shareholder will be required to report his pro rata share of
such gain on his tax return as long-term capital gain, will receive a refundable
tax credit for his pro rata share of tax paid by the Fund on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Alternative minimum tax ("AMT") is imposed in addition to, but only to
the extent it exceeds, the regular tax and is computed at a maximum marginal
rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount.
Investment income that may be received by a Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
may entitle a Fund to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of each Fund's assets to be invested in various
countries is not known. If more than 50% of the value of a Fund's total assets
at the close of its taxable year consist of the stock or securities of foreign
corporations, a Fund may elect to "pass through" to the Fund's shareholders the
amount of foreign taxes paid by the Fund. If a Fund so elects, each shareholder
would be required to include in gross income, even though not actually received,
his pro rata share of the foreign taxes paid by the Fund, but would be treated
as having paid his pro rata share of such foreign taxes and would therefore be
allowed to either deduct such amount in computing taxable income or use such
amount (subject to various Code limitations) as a foreign tax credit against
federal income tax (but not both). For purposes of the foreign tax credit
limitation rules of the Code, each shareholder would treat as foreign source
income his pro rata share of such foreign taxes plus the portion of dividends
received from a Fund representing income derived from foreign sources. No
deduction for foreign taxes could be claimed by an individual shareholder who
does not itemize deductions. Each shareholder should consult his own tax adviser
regarding the potential application of foreign tax credits.
Distributions by a Fund that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by a Fund will be treated in the manner described above
regardless of whether they are paid in cash or reinvested in additional shares
of the Fund (or of another fund). Shareholders receiving a distribution in the
form of additional shares will be treated as receiving a distribution in an
amount equal to the fair market value of the shares received, determined as of
the reinvestment date. In addition, if the net asset value at the time a
shareholder purchases shares of a Fund reflects realized but undistributed
income or gain, or unrealized appreciation in the value of the assets held by
the Fund, distributions of such amounts to the shareholder will be taxable in
the manner described above, although such distributions economically constitute
a return of capital to the shareholder.
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<PAGE>
Ordinarily, shareholders are required to take distributions by a Fund
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by a Fund) on December 31 of
such calendar year provided such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of distributions, and the proceeds of redemption of
shares, paid to any shareholder (1) who has failed to provide a correct taxpayer
identification number, (2) who is subject to backup withholding for failure
properly to report the receipt of interest or dividend income, or (3) who has
failed to certify to the Fund that it is not subject to backup withholding or
that it is an "exempt recipient" (such as a corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of a Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of a Fund will be considered capital gain
or loss and will be long-term capital gain or loss if the shares were held for
longer than one year. Long-term capital gain recognized by an individual
shareholder will be taxed at the lowest rates applicable to capital gains if the
holder has held such shares for more than 18 months at the time of the sale.
However, any capital loss arising from the sale or redemption of shares held for
six months or less will be treated as a long-term capital loss to the extent of
the amount of capital gain dividends received on such shares. For this purpose,
the special holding period rules of Code Section 246(c)(3) and (4) generally
will apply in determining the holding period of shares. Capital losses in any
year are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
a Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from a Fund is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
paid to a foreign shareholder will be subject to U.S. withholding tax at the
rate of 30% (or lower applicable treaty rate) upon the gross amount of the
dividend. Furthermore, such a foreign shareholder may be subject to U.S.
withholding tax at the rate of 30% (or lower applicable treaty rate) on the
gross income resulting from a Fund's election to treat any foreign taxes paid by
it as paid by its shareholders, but may not be allowed a deduction against this
gross income or a credit against this U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as having
paid. Such a foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of a Fund, capital gain
dividends and amounts retained by the Fund that are designated as undistributed
capital gains.
If the income from a Fund is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income and
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
taxpayers.
In the case of foreign noncorporate shareholders, a Fund may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or subject to withholding tax at
a reduced treaty rate) unless such shareholders furnish the Fund with proper
notification of their foreign status.
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<PAGE>
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect.
Rules of state and local taxation of ordinary income and capital gain
dividends from regulated investment companies may differ from the rules for U.S.
federal income taxation described above. Shareholders are urged to consult their
tax advisers as to the consequences of these and other state and local tax rules
affecting investment in a Fund.
MANAGEMENT OF THE FUNDS
The Board of Trustees manages the business and affairs of the Funds.
The Board approves all significant agreements between the Funds and companies
and individuals that provide services to the Funds. The officers of the Funds
manage the day-to-day operations of the Funds. The day-to-day operations of the
Funds are always subject to the investment objective of each Fund. The Board of
Trustees supervises the day-to-day operations
The Board of Trustees and executive officers of the Funds and their
principal occupations for the past five years are listed below. The address of
each Trustee is 225 South Lake Avenue, Suite 777, Pasadena, California, 91101.
Timothy W.N. Guinness -- Trustee. Mr. Guinness has been the Chief Executive
Officer and Joint Chairman of Investec Guinness Flight since August 1998.
Previously, Mr. Guinness was the Chief Executive Officer of Guinness Flight
Hambro Asset Management Limited, London, England.
James I. Fordwood/*/ -- Trustee. Mr. Fordwood is President of Balmacara
Production Inc., an investment holding and management services company that he
founded in 1987. Currently, Balmacara generally is responsible for the general
accounts and banking functions for United States companies specializing in oil
and gas operations.
Dr. Gunter Dufey/*/ --Trustee. Dr. Dufey has been a member of the faculty of the
Graduate School of Business Administration at the University of Michigan since
1969. His academic interests center on International Money and Capital Markets
as well as on Financial Policy of Multinational Corporations. Outside of
academia, he has been a member of the Board of Directors of GMAC Auto
Receivables Corporation since 1992.
Dr. Bret A. Herscher/*/ - Trustee. Dr. Herscher is President of Pacific
Consultants, a technical and technology management consulting company serving
the Electronic industry and venture capital community, which he co-founded in
1988. Additionally, Dr. Herscher has been a Director of Strawberry Tree
Incorporated, a manufacturer of computer based Data Acquisition and Control
products for factory and laboratory use, since 1989.
J. Brooks Reece, Jr./*/ -- Trustee. Mr. Reece has been a Vice-President of
Adcole Corporation, a manufacturer of precision measuring machines and sun angle
sensors for space satellites, since 1993. Prior to becoming a Vice-President, he
was the Manager of sales and marketing. In addition, Mr. Reece is the
Vice-President and Director of
- --------------
/*/ Not an "interested person", as that term is defined by the 1940 Act.
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<PAGE>
Adcole Far East, Ltd., a subsidiary that manages Adcole sales and service
throughout Asia. He has held this position since 1986.
James J. Atkinson, Jr. -- President. Mr. Atkinson has been an executive Director
of Guinness Flight Investment Management Limited, based in Pasadena California,
since November 1993.
Robert H. Wadsworth -- Assistant Treasurer. 4455 East Camelback Road, Suite
261E, Phoenix, Arizona 85018. President, Robert H. Wadsworth and Associates,
Inc. (consultants) and Investment Company Administration Corporation. President
and Treasurer, First Fund Distributors, Inc.
Eric M. Banhazl --Treasurer. 2020 East Financial Way, Suite 100, Glendora,
California 91741. Senior Vice President, Robert H. Wadsworth & Associates, Inc.
(consultants) and Investment Company Administration Corporation since March
1990; Formerly Vice President, Huntington Advisors, Inc. (investment advisor).
Steven J. Paggioli -- Secretary. 479 West 22nd Street, New York, New York 10011.
Executive Vice President, Robert H. Wadsworth & Associates, Inc. (consultant)
and Investment Company Administration Corporation. Vice President and Secretary,
First Fund Distributors, Inc.
Rita Dam --Assistant Treasurer. 2020 East Financial Way, Suite 100, Glendora,
California 91741. Vice President, Investment Company Administration Corporation
since 1994. Member of the Financial Services Audit Group at Coopers & Lybrand,
LLP from 1989-1994.
Robin Berger -- Assistant Secretary. 479 West 22nd Street, New York, New York,
10011. Vice President, Robert H. Wadsworth and Associates, Inc. since June 1993;
Formerly Regulatory and compliance Coordinator, Equitable Capital Management,
Inc. (1991-93).
The table below illustrates the compensation paid to each Trustee for
the Guinness Flight Funds' most recently completed fiscal year:
<TABLE>
<CAPTION>
Total
Aggregate Pension or Compensation from
Compensation from Retirement Benefits Estimated Annual Guinness Flight
Name of Person, Guinness Flight Accrued as Part of Benefits Upon Funds Paid to
Position Funds Fund Expenses Retirement Trustees
- --------------- ----------------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Dr. Gunter Dufey $7,500 $0 $0 $7,500
James I. Fordwood $7,500 $0 $0 $7,500
Dr. Bret Herscher $7,500 $0 $0 $7,500
J. Brooks Reece, Jr. $8,500 $0 $0 $8,500
</TABLE>
Effective January 1, 1998, each Trustee who is not an "interested
person" of the Funds receives an annual fee of $10,000 (with the exception of
the Chairman, who receives $11,000) allocated equally among all the Funds, plus
expenses incurred by the Trustees in connection with attendance at meetings of
the Board of Trustees and their Committees. As of the date of this Statement of
Additional Information, to the best of the knowledge of
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<PAGE>
the Guinness Flight Funds, the Board of Trustees and officers of the Funds, as a
group, owned of record less than 1% of the Funds' outstanding shares.
THE INVESTMENT ADVISOR AND ADVISORY AGREEMENTS
Guinness Flight furnishes investment advisory services to the Funds.
Under the Investment Advisory Agreement (the "Agreement"), Guinness Flight
directs the investments of the Funds in accordance with the investment
objectives, policies, and limitations provided in the Funds' Prospectus or other
governing instruments, the 1940 Act, and rules thereunder, and such other
limitations as the Funds may impose by notice in writing to Guinness Flight.
Guinness Flight also furnishes all necessary office facilities, equipment and
personnel for servicing the investments of the Funds; pays the salaries and fees
of all officers of Guinness Flight Funds other than those whose salaries and
fees are paid by Guinness Flight Funds' administrator or distributor; and pays
the salaries and fees of all Trustees of Guinness Flight Funds who are
"interested persons" of Guinness Flight Funds or of Guinness Flight and of all
personnel of Guinness Flight Funds or of Guinness Flight performing services
relating to research, statistical and investment activities. Guinness Flight is
authorized, in its discretion and without prior consultation with the Funds, to
buy, sell, lend and otherwise trade, consistent with the Fund's then current
investment objective, policies and restrictions in any bonds and other
securities and investment instruments on behalf of the Funds. The investment
policies and all other actions of the Funds are at all times subject to the
control and direction of Guinness Flight Funds' Board of Trustees.
Guinness Flight performs (or arranges for the performance of) the
following management and administrative services necessary for the operation of
Guinness Flight Funds: (i) with respect to the Funds, supervising relations
with, and monitoring the performance of, custodians, depositories, transfer and
pricing agents, accountants, attorneys, underwriters, brokers and dealers,
insurers and other persons in any capacity deemed to be necessary or desirable;
(ii) investigating the development of and developing and implementing, if
appropriate, management and shareholder services designed to enhance the value
or convenience of the Funds as an investment vehicle; and (iii) providing
administrative services other than those provided by Guinness Flight Funds'
administrator.
Guinness Flight also furnishes such reports, evaluations, information
or analyses to Guinness Flight Funds as Guinness Flight Funds' Board of Trustees
may request from time to time or as Guinness Flight may deem to be desirable.
Guinness Flight makes recommendations to Guinness Flight Funds' Board of
Trustees with respect to Guinness Flight Funds' policies, and carries out such
policies as are adopted by the Trustees. Guinness Flight, subject to review by
the Board of Trustees, furnishes such other services as it determines to be
necessary or useful to perform its obligations under the Agreements.
All other costs and expenses not expressly assumed by Guinness Flight
under the Agreements or by the Administrator under the administration agreement
between it and the Funds on behalf of the Funds shall be paid by the Funds from
the assets of the Funds, including, but not limited to fees paid to Guinness
Flight and the Administrator, interest and taxes, brokerage commissions,
insurance premiums, compensation and expenses of the Trustees other than those
affiliated with the adviser or the administrator, legal, accounting and audit
expenses, fees and expenses of any transfer agent, distributor, registrar,
dividend disbursing agent or shareholder servicing agent of the Funds, expenses,
including clerical expenses, incident to the issuance, redemption or repurchase
of shares of the Funds, including issuance on the payment of, or reinvestment
of, dividends, fees and expenses incident to the registration under Federal or
state securities laws of the Funds or their shares, expenses of preparing,
setting in type, printing and mailing prospectuses, statements of additional
information, reports and notices and proxy material to shareholders of the
Funds, all other expenses incidental to holding meetings of the Funds'
shareholders, expenses connected with the execution, recording and settlement of
portfolio securities transactions, fees and expenses of the Funds' custodian for
all services to the Funds, including safekeeping of funds and securities and
maintaining required books and accounts, expenses of calculating net asset value
of the shares of the Funds, industry membership fees allocable to the Funds, and
such extraordinary expenses as may arise, including litigation affecting the
Funds and the legal obligations which the Funds may have to indemnify the
officers and Trustees with respect thereto.
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<PAGE>
Expenses which are attributable to the Funds are charged against the
income of the Funds in determining net income for dividend purposes. Guinness
Flight, from time to time, may voluntarily waive all or a portion of its fees
payable under the Agreement.
The Agreement was approved by the Board of Trustees on June 3, 1998
and by the shareholders of the Funds on August 25, 1998 at a shareholder meeting
called for that purpose. The Agreement will remain in effect for two years from
the date of execution and shall continue from year to year thereafter if it is
specifically approved at least annually by the Board of Trustees and the
affirmative vote of a majority of the Trustees who are not parties to the
Agreement or "interested persons" of any such party by votes cast in person at a
meeting called for such purpose. The Trustees or Guinness Flight may terminate
the Agreement on 60 days' written notice without penalty. The Agreement
terminates automatically in the event of its "assignment", as defined in the
1940 Act.
As compensation for all services rendered under the Agreement,
Guinness Flight will receive an annual fee, payable monthly, of 1.00% of the
Asia Blue Chip Fund's, Asia Small Cap Fund's, China & Hong Kong Fund's, Mainland
China Fund's and New Europe Fund's average daily net assets and .75% of the
Global Government Bond Fund's average daily net assets. Guinness Flight will
receive an annual fee of 0.90% of the Wired Index Fund's average daily net
assets up to $100 million, 0.75% of average daily net assets between $100 and
$500 million, and 0.60% of average daily net assets in excess of $500 million.
Guinness Flight will receive an annual fee of xx% of the [ ] Index Fund's
average daily net assets.
Advisory fees and expense reimbursements/(recoupments) were as follows:
<TABLE>
<CAPTION>
Gross Expenses
Advisory (Reimbursed)/
Fee Recouped
-----------------------------------------------------
<S> <C> <C>
Fiscal year ended December 31, 1997:
Asia Blue Chip Fund $53,636 ($130,732)
Asia Small Cap Fund 1,692,574 71,583
China & Hong Kong Fund 2,958,500 0
Mainland China Fund/1/ 15,705 (11,487)
Global Government Bond Fund 58,063 (185,733)
Fiscal year ended December 31, 1996:
Asia Blue Chip Fund/2/ $12,860 ($92,856)
Asia Small Cap Fund/2/ 62,680 (71,583)
China & Hong Kong Fund 1,772,174 315,433
Global Government Bond Fund 19,110 (176,407)
Fiscal year ended December 31, 1995:
China & Hong Kong Fund $197,173 ($204,298)
Global Government Bond Fund 7,425 (197,114)
</TABLE>
- --------------
/1/ For the period 11/3/97 (commencement of operations) to 12/31/97.
/2/ For the period 4/29/96 (commencement of operations) to 12/31/96.
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<PAGE>
THE ADMINISTRATOR
Investment Company Administrator Corporation (the "Administrator") acts as the
Funds' Administrator under an Administration Agreement. For its services, the
Administrator receives a monthly fee equal to, on an annual basis, 0.25% of the
Funds' average daily net assets, subject to a $40,000 annual minimum for the
China Fund and $80,000 allocated based on average daily net assets of the Asia
Blue Chip Fund, Asia Small Cap Fund, Mainland China Fund and Global Government
Bond Fund.
Administration fees paid by the Funds were as follows:
<TABLE>
<CAPTION>
Year Ended Asia Blue Asia Small China & Hong Mainland Global Government
December 31 Chip Fund Cap Fund Kong Fund China Fund Bond Fund
----------- --------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997 $13,425 $424,336 $739,625 $3,926/1/ $19,733
1996 13,424/2/ 13,424/2/ 443,043 -- 27,122
1995 -- -- 49,293 -- 40,000
</TABLE>
- ---------------
/1/ For the period 11/3/97 (commencement of operations) to 12/31/97.
/2/ For the period 4/29/96 (commencement of operations) to 12/31/96.
ADMINISTRATION AGREEMENT, DISTRIBUTION AGREEMENT AND DISTRIBUTION PLAN
Guinness Flight Funds has entered into separate Administration and
Distribution Agreements with respect to the Funds with Investment Company
Administration Corporation ("Administrator") and First Fund Distributors, Inc.
("Distributor"), respectively. Under the Distribution Agreement, the Distributor
uses all reasonable efforts, consistent with its other business, to secure
purchases for the Funds' shares and pays the expenses of printing and
distributing any prospectuses, reports and other literature used by the
Distributor, advertising, and other promotional activities in connection with
the offering of shares of the Funds for sale to the public. It is understood
that the Administrator may reimburse the Distributor for these expenses from any
source available to it, including the administration fee paid to the
Administrator by the Funds.
The Funds will not make separate payments as a result of the
Distribution Plan to Guinness Flight, the Administrator, Distributor or any
other party, it being recognized that the Funds presently pay, and will continue
to pay, an investment advisory fee to Guinness Flight and an administration fee
to the Administrator. To the extent that any payments made by the Funds to
Guinness Flight or the Administrator, including payment of fees under the
Investment Advisory Agreement or the Administration Agreement, respectively,
should be deemed to be indirect financing of any activity primarily intended to
result in the sale of shares of the Funds within the context of rule 12b-1 under
the 1940 Act, then such payments shall be deemed to be authorized by this Plan.
The Plan and related agreements were approved by the Board of Trustees
including all of the "Qualified Trustees" (Trustees who are not "interested"
persons of the Funds, as defined in the 1940 Act, and who have no direct or
indirect financial interest in the Plan or any related agreement). In approving
the Plan, in
-34-
<PAGE>
accordance with the requirements of Rule 12b-1 under the 1940 Act, the Board of
Trustees (including the Qualified Trustees) considered various factors and
determined that there is a reasonable likelihood that the Plan will benefit the
Funds and their shareholders. The Plan may not be amended to increase materially
the amount to be spent by the Funds under the Plan without shareholder approval,
and all material amendments to the provisions of the Plan must be approved by a
vote of the Board of Trustees and of the Qualified Trustees, cast in person at a
meeting called for the purpose of such vote. During the continuance of the Plan,
Guinness Flight will report in writing to the Board of Trustees quarterly the
amounts and purposes of such payments for services rendered to shareholders
pursuant to the Plan. Further, during the term of the Plan, the selection and
nomination of those Trustees who are not "interested" persons of the Funds must
be committed to the discretion of the Qualified Trustees. The Plan will continue
in effect from year to year provided that such continuance is specifically
approved annually (a) by the vote of a majority of the Funds' outstanding voting
shares or by the Funds' Trustees and (b) by the vote of a majority of the
Qualified Trustees.
DESCRIPTION OF THE FUNDS
Shareholder and Trustees Liability. Each Fund is a series of Guinness
Flight Funds, a Delaware business trust.
The Delaware Trust Instrument provides that the Trustees shall not be
liable for any act or omission as Trustee, but nothing protects a Trustee
against liability to Guinness Flight Funds or to its shareholders to which he or
she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his or her office. Furthermore, a Trustee is entitled to indemnification against
liability and to all reasonable expenses, under certain conditions, to be paid
from the assets of Guinness Flight Funds; provided that no indemnification shall
be provided to any Trustee who has been adjudicated by a court to be liable to
Guinness Flight Funds or the shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office or not to have acted in good faith in the reasonable
belief that his action was in the best interest of Guinness Flight Funds.
Guinness Flight Funds may advance money for expenses, provided that the Trustee
undertakes to repay Guinness Flight Funds if his or her conduct is later
determined to preclude indemnification, and one of the following conditions are
met: (i) the Trustee provides security for the undertaking; (ii) Guinness Flight
Funds is insured against losses stemming from any such advance; or (iii) there
is a determination by a majority of the Guinness Flight Funds' independent
non-party Trustees, or by independent legal counsel, that there is reason to
believe that the Trustee ultimately will be entitled to indemnification.
Voting Rights. Shares of each Fund entitle the holders to one vote per
share. The shares have no preemptive or conversion rights. The dividend rights
and the right of redemption are described in the Prospectus. When issued, shares
are fully paid and nonassessable. The shareholders have certain rights, as set
forth in the Bylaws, to call a meeting for any purpose, including the purpose of
voting on removal of one or more Trustees.
SHAREHOLDER REPORTS
Shareholders will receive reports semiannually showing the investments
of the Funds and other information. In addition, shareholders will receive
annual financial statements audited by the Funds' independent accountants.
Principal Holders. As of June 12, 1998, principal holders owning 5% or
more of the outstanding shares of the Fund as of record date are set forth
below:
-35-
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
Shareholder % held as of
Fund Name & Address June 12, 1998
<S> <C> <C>
====================================================================================================================
China & Hong Kong Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 26.98%
====================================================================================================================
Capital Ventures International
c/o Susquehanna Advisors Group
401 City Avenue, Suite 220
Bala Cynwyd, PA 19004-1117 6.94%
====================================================================================================================
Asia Blue Chip Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 22.14%
====================================================================================================================
Menlo F Smith Ttee
Menlo F Smith Trust
UA DTD 04/08/1988
510 Maryville College Dr. Suite 210
St. Louis, MO 63141-5801 13.10%
====================================================================================================================
Asia Small Cap Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 33.90%
====================================================================================================================
Mainland China Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 20.54%
====================================================================================================================
Global Government Bond Fund Pigeon & Co.
c/o Frost National Bank
P.O. Box 2479
San Antonio, TX 78298-2479 41.19%
====================================================================================================================
Comerica Bank
FBO Oregon Graduate Institute
P.O. Box 75000
Detroit, MI 48275-0001 28.39%
====================================================================================================================
Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 10.28%
====================================================================================================================
</TABLE>
-36-
<PAGE>
FINANCIAL STATEMENTS
The audited statement of assets and liabilities and report thereon for
the Funds for the year ended December 31, 1997 are incorporated by reference.
The opinion of Ernst & Young LLP, independent accountants, with respect to the
audited financial statements, is incorporated herein in its entirety in reliance
upon such report of Ernst & Young LLP and on the authority of such firm as
experts in auditing and accounting. Shareholders will receive a copy of the
audited and unaudited financial statements at no additional charge when
requesting a copy of the Statement of Additional Information.
GENERAL INFORMATION
Independent Contractors: Guinness Flight Investment Management may enter into
agreements with independent contractors to provide shareholder services for a
fee. Shareholder services include account maintenance and processing, direct
shareholder communications, calculating net asset value, dividend posting and
other administrative functions.
Transfer Agent. State Street Bank and Trust Company is the Transfer Agent for
the Funds. The Transfer Agent provides record keeping and shareholder services.
State Street is located at P.O. Box 1912, Boston, MA 02105.
Custodian. Investors Bank and Trust Company is the custodian for the Funds. The
custodian holds the securities, cash and other assets of the Funds. Investors
Bank and Trust is located at 200 Claredon Street, Boston, MA 02116.
Legal Counsel. Kramer Levin Naftalis & Frankel LLP serves as legal counsel for
the Guinness Flight Funds and Guinness Flight Investment Management. Kramer
Levin is located at 919 Third Avenue, New York, NY 10022.
Independent Accountants. Ernst & Young LLP audits the financial statements and
financial highlights of the Funds and provides reports to the Board of Trustees.
Ernst & Young is located at 725 South Figueroa, Los Angeles, CA 90017
-37-
<PAGE>
APPENDIX A
Description of Moody's Investors Service, Inc.'s
Bond Ratings:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*Aaa: Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
*Aa: Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuations
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
*A: Bond which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
*Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of Moody's Commercial Paper Ratings:
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months.
Issuers rated Prime1 or P1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime1 or
P1 repayment capacity will normally be evidenced by the following
characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
-38-
<PAGE>
Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime2 or P2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Description of Standard & Poor's Corporation's
Bond Ratings:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*AAA: Debt rated AAA have the highest rating assigned by S&P to a
debt obligation. capacity to pay interest and repay principal is extremely
strong.
*AA: Debt rated AA have a very strong capacity to pay interest;
and repay principal and differ from the higher rated issues only in small
degree.
*A: Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
*BBB: Debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
NR: Bonds may lack a S&P rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.
Description of S&P's Commercial Paper Ratings:
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days.
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A1: This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus (+) sign designation.
A2: Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
-39-
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. Exhibits
- -------- --------
(a) (1) Certificate of Trust. (2)
(a) (2) Trust Instrument. (2)
(b) By-laws. (2)
(c) None.
(d) Investment Advisory Agreement between Registrant
and Guinness Flight Investment Management Limited.
(5)
(e) General Distribution Agreement between Registrant
and First Fund Distributors, Inc. (5)
(f) None.
(g) Amended Custodian Agreement between Registrant and
Investors Bank & Trust Company. (5)
(h) (1) Amended Transfer Agency and Service Agreement
between Registrant and State Street Bank and Trust
Company. (5)
(h) (2) Amended Administration Agreement between Registrant
and Investment Company Administration Corporation.
(5)
(i) (1) Opinion of Kramer, Levin, Naftalis & Frankel as
to legality of securities being registered. (4)
(i) (2) Opinion of Morris, Nichols, Arsht & Tunnell. (3)
(j) (1) Consent of Kramer Levin Naftalis & Frankel LLP,
Counsel for the Registrant. (6)
(j) (2) Consent of Ernst & Young LLP, Independent Auditors
for the Registrant. (6)
(k) Annual Report for the year ended December 31, 1997
is incorporated by reference from the Rule 30D
filing made by the Registrant on March 6, 1998
(Accession number 0001047469-98- 008899).
(l) Investment Letters. (3)
(m) Distribution and Service Plan. (5)
(n) None
(o) None
(1) Filed as an Exhibit to Post-Effective Amendment No.
5 to Registrant's Registration Statement on Form
N-1A filed electronically on February 14, 1996,
accession number 0000922423-96-000062 and
incorporated herein by reference.
(2) Filed as an Exhibit to Post-Effective Amendment
No. 7 to Registrant's Registration Statement on
Form N-1A filed electronically on March 20, 1997,
accession number 0000922423-96-000220 and
incorporated herein by reference.
C-1
<PAGE>
(3) Filed as an Exhibit to Post-Effective Amendment No.
8 to Registrant's Registration Statement on Form
N-1A filed electronically on April 25, 1997,
accession number 0000922423-97-000401 and
incorporated herein by reference.
(4) Filed as an Exhibit to Post-Effective Amendment
No. 11 to Registrant's Registration Statement on
Form N-1A filed electronically on June 17, 1998,
accession number 0000922423-98-000615 and
incorporated herein by reference.
(5) Filed as an Exhibit to Post-Effective Amendment
No. 12 to Registrant's Registration Statement on
Form N-1A filed electronically on August 28, 1998,
accession number 0000922423-98-000948 and
incorporated herein by reference.
(6) Filed herewith.
ITEM 24. Persons Controlled By or Under Common Control with Registrant
None.
ITEM 25. Indemnification
Article X, Section 10.02 of the Registrant's Delaware Trust
Instrument, incorporated herein by reference to Exhibit 1(b) to
Post-Effective Amendment No. 7 to Registrant's Registration
Statement on Form N-1A filed electronically on March 20, 1997,
provides for the indemnification of Registrant's Trustees and
officers, as follows:
"Section 10.02 Indemnification.
(a) Subject to the exceptions and limitations contained in Subsection
10.02(b):
(i) every person who is, or has been, a Trustee or officer of
the Trust (hereinafter referred to as a "Covered Person")
shall be indemnified by the Trust to the fullest extent
permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any
claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or
having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened
while in office or thereafter, and the words "liability" and
"expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the
Trust or its Shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office or (B) not to
have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his
office, (A) by the court or other body approving the
settlement; (B) by at least a majority of those Trustees who
are neither Interested Persons of the Trust nor are parties
to the matter based upon a review of readily available facts
(as opposed to a full trial- type inquiry); or (C) by
written opinion of independent legal counsel based upon a
review of readily available facts (as opposed to a full
trial-type inquiry).
C-2
<PAGE>
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall
be severable, shall not be exclusive of or affect any other
rights to which any Covered Person may now or hereafter be
entitled, shall continue as to a person who has ceased to be
a Covered Person and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Nothing contained herein shall affect any rights to
indemnification to which Trust personnel, other than Covered
Persons, and other persons may be entitled by contract or
otherwise under law.
(d) Expenses in connection with the preparation and
presentation of a defense to any claim, action, suit or
proceeding of the character described in Subsection (a) of
this Section 10.02 may be paid by the Trust or Series from
time to time prior to final disposition thereof upon receipt
of an undertaking by or on behalf of such Covered Person
that such amount will be paid over by him to the Trust or
Series if it is ultimately determined that he is not
entitled to indemnification under this Section 10.02;
provided, however, that either (i) such Covered Person shall
have provided appropriate security for such undertaking,
(ii) the Trust is insured against losses arising out of any
such advance payments or (iii) either a majority of the
Trustees who are neither Interested Persons of the Trust nor
parties to the matter, or independent legal counsel in a
written opinion, shall have determined, based upon a review
of readily available facts (as opposed to a trial-type
inquiry or full investigation), that there is reason to
believe that such Covered Person will be found entitled to
indemnification under this Section 10.02."
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees,
officers, and controlling persons or Registrant pursuant to
the foregoing provisions, or otherwise, Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Investment Company Act of 1940, as amended,
and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the
payment by Registrant of expenses incurred or paid by a
trustee, officer, or controlling person of Registrant in the
successful defense of any action, suit, or proceeding) is
asserted by such trustee, officer, or controlling person in
connection with the securities being registered, Registrant
will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of
such issue.
ITEM 26. Business and Other Connections of Investment Adviser
Guinness Flight Investment Management Limited provides management
services to the Registrant and its series. To the best of the Registrant's
knowledge, the directors and officers have not held at any time during the past
two fiscal years or been engaged for his own account or in the capacity of
director, officer, employee, partner or trustee in any other business,
profession, vocation or employment of a substantial nature.
ITEM 27. Principal Underwriters
(a) First Fund Distributors, Inc., the Registrant's principal
underwriter, also acts as the principal underwriter for the following investment
companies:
(1) Jurika & Voyles Fund Group;
(2) RNC Mutual Fund Group, Inc.;
(3) PIC Investment Trust;
(4) Hotchkis & Wiley Funds;
(5) Masters' Select Equity Fund;
(6) O'Shaughnessy Funds Inc.;
(7) Professionally Managed Portfolios;
- Avondale Total Return Fund
- Osterweis Fund
C-3
<PAGE>
- Perkins Opportunity Fund
- Pro Conscience Women's Equity Mutual Fund
- Academy Value Fund
- Trent Equity Fund
- Leonetti Balanced Fund
- Lighthouse Growth Fund
- U.S. Global Leaders Growth Fund
- Boston Managed Growth Fund
- Harris Bretall & Sullivan & Smith Growth Fund
- Pzena Growth Fund
- Titan Investment Trust
(8) Rainier Investment Management Mutual Funds;
(9) Kayne Anderson Mutual Funds;
(10) The Purisima Total Return Fund;
(11) Advisor's Series Trust;
- American Trust Allegiance Fund
- Information Tech 100 Mutual Fund
- Kaminski Poland Fund
- Ridgeway Helms Millenium Fund
(b) The following information is furnished with respect to the
officers and directors of First Fund Distributors, Inc., Registrant's principal
underwriter:
Name and Principal Position and Offices with Position and Offices
Business Address Principal Underwriter with Registrant
Robert H. Wadsworth President/Treasurer Assistant Treasurer
4455 East Camelback Road
Suite 261E
Phoenix, AZ 85014
Steven J. Paggioli Vice President/Secretary Secretary
479 West 22nd Street
New York, NY 10011
Eric M. Banhazl Vice President Treasurer
2020 East Financial Way
Suite 100
Glendora, CA 91741
(c) not applicable
ITEM 28. Location of Accounts and Records
The accounts, books or other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules promulgated thereunder are
maintained by Investment Company Administration Corporation, 2020 East Financial
Way, Suite 100, Glendora, CA 91741, except for those maintained by the Fund's
Custodian.
ITEM 29. Management Services
Not applicable.
ITEM 30. Undertakings
(1) Registrant undertakes to furnish each person to whom a prospectus
is delivered, a copy of the Fund's latest annual report to shareholders which
will include the information required by Item 5A, upon request and without
charge.
C-4
<PAGE>
(2) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a trustee or trustees if
requested to do so by the holders of at least 10% of the Registrant's
outstanding voting securities, and to assist in communications with other
shareholders as required by Section 16(c) of the 1940 Act.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and the State of New York on
this 2nd day of April, 1999.
GUINNESS FLIGHT INVESTMENT FUNDS
By: /s/ James J. Atkinson
-----------------------------
James J. Atkinson
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Eric Banhazl Treasurer April 2, 1999
- -------------------------------
Eric Banhazl
/s/ Dr. Gunter Dufey Trustee April 2, 1999
- ------------------------------
Dr. Gunter Dufey
/s/ J. I. Fordwood Trustee April 2, 1999
- -------------------------------
J. I. Fordwood
/s/ Timothy W. N. Guinness Trustee April 2, 1999
- -------------------------------
Timothy W. N. Guinness
/s/ Bret A. Herscher Trustee April 2, 1999
- -------------------------------
Bret A. Herscher
/s/ J. Brooks Reece, Jr. Trustee April 2, 1999
- -------------------------------
J. Brooks Reece, Jr.
*By:_______________________
Attorney-in-Fact
C-6
<PAGE>
EXHIBIT INDEX
EX-99.B10 Consent of Kramer Levin Naftalis & Frankel LLP, Counsel
for the Registrant
EX-99.B11 Consent of Ernst & Young LLP, Independent Auditors for the
Registrant
[LETTERHEAD OF KRAMER LEVIN NAFTALIS & FRANKEL LLP]
April 1, 1999
Guinness Flight Investment Funds
225 South Lake Avenue
Suite 777
Pasadena, California 91101
Re: Guinness Flight Investment Funds
Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A
File No.33-75340; ICA No. 811-8360
----------------------------------
Dear Gentlemen:
We hereby consent to the reference of our firm as Counsel in this
Registration Statement on Form N-1A.
Very truly yours,
/s/Kramer Levin Naftalis & Frankel LLP
[LETTERHEAD OF ERNST & YOUNG LLP]
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Independent
Accountants" and "Financial Statements" in Post-Effective Amendment No. 20 under
the Securities Act of 1933 and Amendment No. 20 under the Investment Company Act
of 1940 to the Registration Statement (Form N-1A No. 33-75340) and related
Prospectus and Statement of Additional Information of Guinness Flight Investment
Funds, and to the incorporation by reference therein of our report dated
February 6, 1998, with respect to the financial statements and financial
highlights of Guinness Flight Investment Funds included in its Annual Report for
the year ended December 31, 1997 filed with the Securities and Exchange
Commission.
/s/ERNST & YOUNG LLP
Los Angeles, California
April 2, 1999
